Introduction

According to the public interest approach to regulation, intervention in the market process occurs to protect and promote the economic welfare of the community (alternative approaches to or explanations of regulatory policies are discussed by Posner 1974 and Sieper 1982). Thus, the task of the regulator is to discover instances of market failure–where market practices have resulted in price and output distortions and a misallocation of resources–and to reap the potential gains to society through market intervention.

However, while the concept of market failure is quite well known, even among non-economists, less familiar is the corresponding notion of regulatory failure - that is, where government actions, for a variety of possible reasons, do not result in net welfare gains to the community. Once the notion of regulatory failure is accepted, the appropriate policy response to any economic problem facing society becomes less clear. In particular, there is no guarantee, ex ante, that government intervention will improve community welfare.

In the next section, the requirements for an economic rationale for government intervention are outlined. Possible sources of market failure relating to land degradation and some potential pitfalls in government intervention in market decisions, particularly in the context of land degradation, are explored in the following two sections. The major conclusions are contained in the last section.

An economic justification for government intervention

Two conditions are necessary to provide an economic justification of government intervention in private decision making.