Indeed, the choice between government provision and other generic policies is
one of the least-well-understood policy issues. Perhaps the reason is that, while we
have a convincing theory of market failure and an increasingly convincing theory of
government faiiure, we have no overreaching theory that delineates the eficiency
tradeoffs between market failure and government failure.Iz6
It is tempting to believe that the theory of market failure itself resolves this
dilemma: Direct government provision is appropriate when there is endemic market
failure. This is a weak argument as it ignores the fact that market failures can be addressed
with other generic policies. Therefore, market failure provides a rationale
generally for government intervention, rather than specifically for direct provision by
government. For example, consider the possible responses to natural monopoly: auctions
to take advantage of competition far markets, subsidies to facilitate marginal
cost pricing, and direct regulation. These approaches are alternatives to government
ownership of the monopoly.