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Article Summary

David Lowery, 1998. Consumer Sovereignty and Quasi-Market Failure Journal of Public Administration Research and Theory, pp.137-172.

In this article, David Lowery, a scholar in urban politics and public administration, examines the idea of quasi-market failure in institutions such as vouchers, contracting, and the Tiebout model. Using the notion of consumer sovereignty, which asserts that consumer preferences dictate the production of goods and services, he looks at three potential sources of quasi-market failure: failure in quasi-market formation, failure by preference error, and failure by preference substitution.

To begin, Lowery looks at the meaning of consumer sovereignty. He argues that the term has not only a descriptive meaning, as stated above, but also a normative meaning. This normative meaning values the idea that an economy should be evaluated based on the degree to which it fulfills the wants of consumers. Lowery states that this public-choice perspective takes too narrow a view of the purposes of public good provision.

The first source of quasi-market failure that Lowery examines is failure in quasi-market formation. This type of failure occurs when quasi-markets lack competition. This occurs in rural settings with insufficient demand to support more than a single provider. Another potential cause is quasi-legal barriers to entry, such as political influence or standing relationships of trust between monopoly producers and local governments. This type of failure also occurs in Tiebout quasi-markets, when there are not enough independent jurisdictions to create a competitive market.

The second source of quasi-market failure relates to the notion of preference error. Preference error occurs when consumer lack sufficient information to make choices based on their true preferences. This problem is particularly common in quasi-markets that rely on direct decisions by consumers. For example, the idea of education vouchers is based on the assumption that parents have sufficient knowledge about what constitutes quality education in order to create a competitive market of schools. This sort of failure can also arise from externalities, which cause the benefits of contracting to be overestimated relative to its true social costs. He argues that the so-called benefits of contracting often come in the form of reduced labor costs, which effectively reduce the exchange value of public employees’ labor.

The third source is failure by preference substitution. This sort of failure results from the separation of provision and production. This separation creates two sets of consumers: those who make the collective decision to provide a public good or service and those who consume the good within the quasi market. In order to provide consumer sovereignty, both sets must be satisfied.

One theme that Lowery brings up throughout the article is that of segregation. He uses the example of schools again, citing evidence that those who choose to exit the public school system typically do so in order to provide their children with either religious services or segregation from other races or socioeconomic groups. He suggests that creating a quasi-market system, such as a voucher plan, will simply substitute the providing consumers’ preference for quality education with the production consumers’ preference for segregation, thus efficiently producing segregation but not quality education.

Lowery concludes with the idea that our current frameworks for criticizing market and nonmarket failure are easily applied to the notion of quasi-market failure, and thus it seems strange why quasi-market failure has received so little attention. In his demonstration of different types of quasi-market failure, he attempts to defend progressive reform in nonmarket institutions by demonstrating that privatization is not a magic cure for all our fiscal ills.