both public- and private-sector decision making. In fiscal 1996 its budget was nearly $53 million.

To understand and evaluate the function of any such federal agency, it is necessary to first appreciate the reasons for public economic policy in a representative democracy with a market economy. These reasons drive the policy making agenda. The provision of research and information in support of public economic policy is itself an economic activity. Whether the right amount of research and information will be provided by the private sector, and, if not, how government should intervene, is itself a very interesting question of public economic policy. The answer depends on the relevant characteristics of this economic activity. Much of this report is an analysis of these characteristics and their implication for how the production of research and information in support of public economic policy should be organized. The themes set out in this chapter reappear subsequently in this report in the detailed consideration of the specifics of the ERS.

The Nature of Public Economic Policy

Governments regularly intervene in market economies in representative democracies when the conditions that are necessary for markets to produce an efficient and equitable distribution of resources do not exist. Although specific reasons for intervention are many and vary with times and issues, many interventions can be ascribed to one of several kinds of actual or perceived failures of markets to produce efficient outcomes. Sources of these failures include natural monopolies, externalities, public goods, barriers to information, ill-defined property rights, and considerations of equity

Natural Monopolies

Markets can lead to inefficient production levels in a particular industry, if it is technically most efficient for the good produced in that industry to be provided by a single firm. This will happen if the cost per unit of production continues to go down as more of the good is produced. For example, it was technically inefficient for more than one railroad to provide service to a local community, in most cases. The market outcome is a monopoly firm, which then charges a higher price than would be charged in a competitive industry. Consumers will demand less, and too little of the good will be produced. The usual solution is that the industry is regulated, or even owned, by the government, with the objective of producing a more efficient volume of the good. In the case of nineteenth-century railroads, the Interstate Commerce Commission was created to oversee freight rates. The cost of information sometimes continues to go down as more of it is produced by the same organization. For example, the Census Bureau produces the large national censuses and several household surveys. These products are widely used in the private sector as well as for public policy making.

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