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Economic Rationale Projects

The document discusses the economic rationale for public sector interventions in investment projects, focusing on market and non-market failures that justify such actions. It highlights various types of market failures, including externalities, public goods, and information failures, and outlines the need for government interventions and policy reforms to address these issues. Additionally, it addresses the challenges of non-market failures and the importance of governance and institutional capacity building in achieving optimal outcomes.

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ignatius kuncoro krisnugroho
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19 views15 pages

Economic Rationale Projects

The document discusses the economic rationale for public sector interventions in investment projects, focusing on market and non-market failures that justify such actions. It highlights various types of market failures, including externalities, public goods, and information failures, and outlines the need for government interventions and policy reforms to address these issues. Additionally, it addresses the challenges of non-market failures and the importance of governance and institutional capacity building in achieving optimal outcomes.

Uploaded by

ignatius kuncoro krisnugroho
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Session 2.

2
Economic Rationale of Projects

Introductory Course on Economic Analysis


of Investment Projects
6 May 2008
Economic Rationale of Projects
Basic Questions:
• Why public sector interventions?
Justifications
• Does the project crowd out private
investments?
• Does the project have the proper mix of
 Investments
 Policy Reforms
 Institutional Capacity Building
Market Failures:
Deviation from free market solution

Market failures justify public interventions in


the economy
Externalities
Public goods
Imperfect markets
Information failures
Coordination failures
Equity Issues: Market does not guarantee
equitable distribution
Merit Goods: Intentional government failures
Externalities - Negative
P

SMC
PMC

P*
P

MB
Q
Q Q*

Markets produce more than optimal quantity Interventions


Externalities - Positive
P

P*

MSB
MPB
Q
Q Q*

Markets produce less than optimal quantity Interventions


Public Goods – Free Rider Problem
P

MWTPa

MWTPb
MC

Qa Qb Q* Q
* Markets under-provide public goods Public Provision
Natural Monopolies

LAC
LOSS
P* LMC

Q* Q
Private sector will not invest Public investments
Tariff and regulatory measures
Information and Coordination Failures
 Public goods character
 Information asymmetry
moral hazard
adverse selection
 Self discovery problems
 Coordination failures
Non-Market Failures
 Market failures justify government
interventions but governments also fail to
deliver optimal outcomes
 Inaction
 Wrong interventions
 Non-optimal interventions

 Demand and supply for public actions


 Decided through political process
 Decoupling between burdens and benefits
 Difficulty in measuring outputs
 Single source production
 Lack of exit mechanism
Sources of Non-Market Failures - 1

 Redundant and rising costs


 Internalities and organizational goals
Budget growth
Technological advances
Information acquisition
 Derived externalities
 Distributional inequity
Sources of Non-Market Failures – 2

 Failure by structure
 Failure by legitimacy
 Failure by Information
 does not encourage foresight
 inappropriate for organization’s agenda
 conflicting policy goals
Summary
Market and non-market failures help identify correct actions

No Interventions
Perfect Market

Private sector Operations


Well Functioning  Catalytic role
Market – Minor  Public Private Partnership
Deficiencies  Regulatory Measures

Market Failures Government Interventions

Non-Market Policy Reforms and


Failures supplementary
measures
Market Failures
 Externalities – Internalization (regulation, taxes,
subsidies)
 Public goods – Public provision
 Property rights – Community management,
privatization
 Information failures – Research, public
provision, subsidies, competitive bidding
 Coordination failures – Industrial policy,
incentives
 Natural Monopolies – Public provision
Non-Market Failures

 Policy reforms
 Regulatory reforms
 Institutional strengthening, capacity
building
 Governance, accountability
 Privatization, service contracts, public
private partnerships, out-sourcing
Thank you

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