Which economic activities should be in the hands of markets and which directed by governments? How should policymakers analyze the pros and cons of privatizing public services? How can one diagnose the inefficiencies of governmental organizations and move to remedy them? Charles Wolf’s important new book provides a valuable framework for addressing the!e and related questions. Wolf, Dean of the RAND Graduate School in California, has ample experience in the developing countries and some of the empirical work in the book pertains particularly to them. But his audience and his contribution are more general.
Wolf reviews the economic literature concerning market failures. He notes that this literature has often been used to justify governmental intervention. But such intervention itself creates characteristic problems and costs, which Wolf labels “nonmarket failures,” and these have not been analyzed as systematically. In what Wolf calls the “cardinal choice” between market and government, he provides a paradigm for analyzing the advantages and defects of both these imperfect alternatives.