Although the danger of opportunistic behavior is most starkly revealed in the
area of national defense, it is by no means unique to it. The collection of taxes, the
printing of money, the administration of justice, all could potentially face serious
agency problems i f supplied by private firms.
Our analysis suggests a double market-failure test for the use of public agencies:
first, evidence of market failure or a redistributive goal; second, evidence either that
a less-intrusive generic policy cannot be utilized or that an effective contract for private
production cannot be designed to deal with the market failure (that is, opportunism
cannot be reasonably controlled). While we believe that this double marketfailure
approach provides a rationale for government production, only modest
progress has been made in delineating the range of circumstances in which government
production is likely to be the best generic policy.'29 The task is especially difficult
because public agencies themselves, as we saw in Chapter 8, are prone to serious
principal-agent problems.
In spite of these theoretical difficulties, we can at least provide an overview of
alternative forms of nonmarket supply. Broadly speaking, once a decision has been
made to supply goods publicly, governments can do so either directly or indirectly.
Direct supply involves production and distribution of goods by government bureaus.
As outlined in Table 9.4, the major means of indirect supply are independent agencies
(usually government corporations or special-districts) or various forms of contracting
out. Although these distinctions are theoretically clear, in practice they are
often less so.