In the present scenario the most developing segment is the rural area and it becomes a very important section in the economy of any country. This paper examines and compares institutional arrangements addressing market failures endemic to rural areas. It argues that rural markets failures cannot be satisfactorily addressed by for-profit firms and thus require the operation of third sector organizations, such as NGOs, cooperatives, and associations. The important role of these organizations in rural development is explained by the particular severity of rural market failures that inhibit the development of rural markets and thus constrain the operation of rural for-profit firms. This argument is applied to the development of rural tourism in Central and Eastern Europe. The rural tourist markets in this region are shown to fail in a number of ways that require recourse to tourism associations and other relevant thrd sector organizations. The paper concludes with calling for further research on developing the institutional economic theory of the rural third sector.

The Potential Role of TSOs

The actual and potential roles of third sector organizations (TSOs) in the development of rural tourism in CEE follow directly from the three types of tourist markets’ failure identified above. First, the information-related transaction costs of agritourist farms can be reduced by TSOs in the form of local and regional tourism associations. These associations would be engaged in jointly conducting market research in order to reduce uncertainty about the demand for tourist services of agritourist farms. Second, the complex nature of the tourist services requires the undertaking of joint marketing strategies which can again be developed by local and regional tourism associations. Joint marketing strategies are particularly important in view of the generally recognized fact that the true competitors in rural tourism are not individual agritourist farms in the same locality but rather different tourist localities . In addition to joint marketing, regional tourism associations can define and enforce the quality standards and provide training opportunities for individual agritourist farms. These measures are crucial for enhancing these farms’ competitiveness in the long term. Finally, the problem of substantial positive and negative external effects of local actors’ activities can be solved through TSOs comprising different stakeholders of local rural development, including local enterprises, media, local officials and politicians, and local rural dwellers. These TSOs would provide the arenas for internalizing the external effects and could take the form of local development partnerships (such as those within the framework of the EU LEADER program) and regional development associations. Their major task would be the coordination of activities aimed at ensuring the overall positive image of specific rural areas in the eyes of potential tourists

This paper has re-examined the issue of institutional response to rural market failures from an institutional economics perspective. This perspective requires recognizing that market failures can be addressed by different institutions in different ways. In rural areas, market failures have been shown to be of such a nature that their addressing requires the operation of TSOs supplementing the for-profit firms. The reason is that the for-profit firms’ operation in rural areas to due to particular severity of rural market failures in view of the characteristics of rural areas such as population scarcity, geographical dispersion, relatively poor infrastructure, and relatively low per-capita incomes. This argument reveals the institutional economics rationale behind rural TSOs and lends theoretical support to policies promoting these organizations’ role in rural
development, such as the Leader program in the EU. At the same time, the paper has identified a research area that needs
to be developed further in both positive and normative respects.

Reference : http://www.scienceandnature.org/IJEMS-Vol2(1)-Jan2011/IJEMS_V2(1)9.pdf

1Mohd. Naseem, 2 Vishal Jain & 3 Kamlesh Shukla