Market Based Allocation Methods

15. Market based allocation methods include resource pricing⁶ and auctions. Both methods place a cost on the use of a resource to encourage efficient utilisation.

16. With the creation of a market for a resource the question of value arises. Valuation methods are available to provide some guidance particularly where resource pricing is going to be used; however, the use of auctions means this is not always necessary as auctions do not require the government to have knowledge about value. Businesses themselves are seen to be in the best position to value the resource. However, when a market is thin, the government may use a valuation method to set a reserve price to ensure a fair return to the Crown. Similarly a valuation method could be used to determine if a more costly and complex allocation method is worth perusing.

17. When spectrum rights are defined well, with proper auction design and implementation, auctions allocate resources to the parties with the highest valuations; therefore it is assumed that the resource will be put to its most valuable use. From a societal viewpoint this will result in allocative efficiency where the highest bidders' values reflect society's value for the resource.

18. Auctions typically involve either a large number of sellers and one buyer (often referred to as a reverse auction or procurement auction), or a large number of buyers and one seller. In the private sector both forms are commonly used in the exchange of goods and services. In the public sector, the former auction is much more prevalent with the government being the sole purchaser. Both types of auctions - if designed and implemented appropriately - reduce information and transaction costs, provide for an effective price discovery mechanism, bring transparency to the process, generate societal value for the money, and encourage open and effective competition.

19. The second type of auction is increasingly used by nations for the allocation of such common resources as radio spectrum, water, and air (in the form of pollutant emission rights). Here nations have created property rights around resources that have traditionally been common goods in order to control their use and provide a mechanism for them to be used where they are most valued.