| JUSTIFYING
ACTION |
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INTRODUCTION |
|
3.1 |
Before any possible action by government is contemplated, it is
important to identify a clear need which it is in the national interest
for government to address. Accordingly, a statement of the rationale
for intervention should be
developed.
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| |
Key
questions for justifying action:
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Is
the rationale for intervention clear? |
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Is
it reasonable to assume that intervention will be
cost-effective: i.e. that the benefits of intervention
will exceed the costs?
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REASONS
FOR GOVERNMENT INTERVENTION
|
3.2 |
This
underlying rationale is usually founded either in market failure
or where there are clear government distributional objectives that
need to be met. Market failure refers to where the market has not
and cannot of itself be expected to deliver an efficient outcome;
the intervention that is contemplated will seek to redress this.
Distributional objectives are self-explanatory and are based on
equity considerations.
|
3.3 |
Government
intervention can incur costs and create economic distortions. These
must be taken into account to determine whether intervention is
warranted. For example, a regulation may be successful in addressing
a particular market failure, but might also involve other costs
that mean that overall it is not worthwhile.
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CARRYING
OUT RESEARCH
|
3.4 |
The
first step in appraisal is usually to carry out research, to identify
the scope of the issues involved and the basis for government action.
The research may cover the following:
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| |
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The
result if nothing changed, or if there was minimal change; |
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The
market situation (e.g. cause of any market failure, employment
levels); |
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Current
and projected trends and published forecasts (e.g. population,
services volume, demand, relative prices and costs); |
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Potential
beneficiaries (and those who may be disadvantaged); |
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Technological
developments; and, |
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Whether
the problem to be addressed changes in scope or magnitude
over time e.g., effects can multiply over generations. |
|
3.5 |
Determining
the rationale for government intervention is discussed further in
Annex 1.
|
3.6 |
Box
4 provides an illustrative example to demonstrate the reasoning
and evidence that would be required to justify government intervention.
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BOX
4: EXAMPLE ‘EXPANDING VOCATIONAL TRAINING’ |
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There is evidence that skilled workforces have positive
impacts on high-level economic aims, such as productivity
and GDP growth. At the same time, there is evidence of a
major skills deficiency in the UK, which is reflected in
the low numbers holding intermediate level vocational qualifications,
compared to Germany and other European countries. There is
further evidence that there are three forms of market failure
that continue to cause this skills gap:
| 1. |
Externalities
leading to under-investment in training by employers.
Firms are concerned that once trained, an employee
will leave the firm before the firm has recouped its
investment. Unless training pays off very quickly,
firms are therefore reluctant to provide training
to their workers. |
| 2. |
Imperfect
information leading to employees being unable to judge
the quality of their training or appreciate the benefits. This
reduces their willingness to accept lower wages during
the training period or to receive any training at
all. |
| 3. |
Credit
market imperfections. Training is costly, but individuals
expect to obtain higher wages from training. Some
individuals may wish to borrow to fund training in
the expectation that they will be able to pay back
the loan through higher future wages. However, low-paid
employees in particular are likely to be credit constrained
and unable to obtain loans to pay for training. |
These
market failures mean that the level of training provided
by the market is likely to be inefficiently low from society’s
point of view. Well-designed government intervention may
help to bridge the gap.
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