Quasi Markets

8/7/2019 Quasi Markets

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QUASI MARKETS

Quasi Market reform was introduced by theconservative Government in the late 80s across abroad range of public sector industries:y Social Care

y Education

y Health

It was introduced to encourage efficiency gains withinthese sectors, whilst stopping short of completeprivatisation.

Its a move from Total Public control (Financing

+ Provision) to Public Financing andPurchasing from semi-independent providers.

In addition the METHOD of funding alsochanged: a voucher system was implicitly introducedin education and Health Care, for example.


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QUASI MARKETS

Differences from conventional markets:

y Supply side:

Providers not necessarily out to maximise profits, as in aprivate market, nor are they necessarily privately owned.

Ownership structure and goals are therefore looselydefined.

Prices will not accurately convey MC, but accounting cost.

Information problems: Moral hazard and Adverse Selectionare Prevalent.

State can provide unspecified contracts to deal with

uncertainty Private sector cant.y Demand side:

Consumer purchasing power not in direct currency but inan earmarked budget or voucher (which cannot be toppedup).

Decision may not be made directly by the consumer, but

instead by a third party acting on his/her behalf i.e., GPsin Health Care.


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QUASI MARKETS

Reasons For Quasi Markets:y Decentralisation of budgeting and decision making allows for more

flexibility in the system to allow for adjustment to local needs.

y X-Efficiency gains from competition.y Allocative Efficiency gains from consumer choice.

y Because of unresponsiveness of the previous system, it was deemed to be

INEQUITABLE as well as INEFFICIENT. However:

y Because of no profit motive, X-inefficiency may prove recalcitrant.

y The entire reason for initially having a welfare state must be kept in mind:The presence of market failures. Control must be exerted to preventthese market failures from reoccurring in a Quasi-Market system.

y There may be upward pressures on costs: Large set up costs

Advertising costs Low bargaining power against trade unions Rise in Wages.

Due to difficulty of measuring QUALITY OF OUTPUT, focus may be given toQUALITY OF INPUTS Rise in costs without discernable improvement of outputquality.

y Allocative efficiency gains may be hampered by lack of localcompetition.

y Due to being faced with a hard budget constraint, there may be attemptsto cream skim. This could be remedied via a positively discriminatory

voucher, but there are problems with that, noted in the extension to theslides.


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QUASI MARKETS IN PRIMARY

AND SECONDARY EDUCATION


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QUASI MARKETS IN EDUCATION

Established with the 1988 Education Reform Act.

The act proposed the following measures:y Formula Funding

y Open Enrolment

y Opt out

y Local Management of Schools (LMS) Decentralised budgets and provision of a set of common services paid for

by the Local Education Authority by taking ~ 15% of the budget.

y A National Curriculum Ensuring a MINIMUM STANDARD

However, four reasons how it falls short of a full marketsystem:y No money can escape to the private sector.

y No free entry, no provision for bankruptcy.

y National Curriculum restricts choice.

y Budgets are constrained by a centrally determinedteachers pay scale.


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Formula Funding:

y Pre-formula funding, budgets allocated administratively,with a high degree of inertia. This, however, did allow fora roughly constant pupil/teacher ratio.

y Formula Funding based on the concept thatMONEYFOLLOWS PUPIL. It can be viewed as a fixed voucher

system (similar to Jencks).

y However, it also has fixed elements anddiscretionary spending although discretionaryspending is being reduced, in 1990/91, money followspupil only accounted for 56% of the total budget.

y Pupil/Teacher ratio rose under the conservativeGovernment, but because of a spending freeze.

y Possibility ofweighting the funding formula to takeinto account those children with special needs that requiremore resources.

HOWEVER, studies have shown increases in fundinghave only a minor impact on educational attainment.


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LMS:

Pros:y Schools can react more ably to local needs, reducing X

inefficiency.

y LMS provides a mechanism for the optimal provision of

services determined by localised needs common servicesshould be purchased when they are needed, and theyshould be purchased at cost.

y Local bargaining of wages for head teachers and supportstaff

Cons:y Arguments that there will be higher concentrations of

kids with special needs in certain areas means that someschools will draw from the set of common servicesdisproportionately (could be remedied via a PDV, however,remember previous discussion).

y Local bargaining of wages would disproportionatelybenefit those in richer areas, and will weaken bargainingpower against monopoly trade unions.

In sum, the case for LMS holds up well under economicscrutin .


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Problems with extending the market principles:

Information Problems:y League Tables are not adjusted for background ability (the largest

influence on educational attainment), nor is such information abundant.y However, studies by Rutger et al. show that schools with mixed ability

intakes tend to do better on a standardised, although not absolute,

basis.y Education is an Experience Good. Thus, there are high SUNK

COSTS associated with its consumption. This may lead to parentsproving recalcitrant to moving their child elsewhere, making marketsignals somewhat unreliable.

Cream Skimming:y A fully private market would lead to a high degree of selectivity due to the

problem ofAdverse Selection

y

Those children with the highest needs would require more resources and,as weve seen, a PDV would not be able to sufficiently increase theincentive for high achieving schools to consider such applicants.

y This is not optimal, as stated above, since mixed ability schools tend to dobetter.

Externalities:y In addition, there are externalities from mixed ability schools they

could possibly foster local cohesion and act as a vehicle for social

mobility.


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QUASI MARKETS IN THE NHS


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Quasi market reform came into effect with the WorkingFor Patients act of1989.

y Changed GPs into small HMOs (making themFUNDHOLDERS), increasing the power of GPs, increasingpressures on hospitals to become more efficient.

y Purchasers (GPs) and Providers (Hospitals) wereseparated.

y Well Managed Hospitals could become Self Governingtrusts.

Supply side Effects:

y Introduce competition between hospitals (and hopefully see

efficiency gains).

Demand side Effects:

y Consumers do not spend cash, but an earmarked budgetdesignates their constraint (voucher system).

Consumer Choice:

y

Allows them greater choice to an extent via choosing GPand Hospital.


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How useful is competition?

y There is still excess demand, due to the existence of

waiting lists.

y Competition stymied by geographical considerations.

y Competition ONLY benefits the well informed and BOTHthe GP and Patient can be accused of being ill informed.

Assessing the reforms is difficult because:

y Of the common problems in evaluation techniques.

y The reforms were coupled with a spending boost, so

causality is difficult to establish.

y Self selection Those hospitals that were performing

better automatically took up the reforms.

y According to Le Grand (2002), attempts to give Hospitals

more freedom has been marginally positive.


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Quasi Markets

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