|I|Accommodation and Food Services|8|8||
|---|---|---|---|---|
|J|Information and Communication|26|26||
|K|Financial and Insurance Activities*|18|16|_Pension funding (6530) is excluded on the basis that it_<br>_involves principally (voluntary) employer pension plans,_<br>_activities proximate to compulsory social security activities._<br>_Central Banking (6411) is also excluded._|
|L|Real Estate Activities|4|4||
|M|Professional, Scientific, and Technical<br>Activities|19|19||
|N|Administrative and Support Services|33|33||
|O|Public Administration and Defense|9|0|_Excluded because it involves the provision of public goods._<br>_Defense is also deemed to be of critical strategic interest._|
|P|Education|11|0|_Excluded because it generally involves the provision of_<br>_public goods and characterized by positive externalities._<br>_Activities in this area are deemed to concern_<br>_developmental or national public interests._|
|Q|Human Health and Social Work<br>Activities|12|0|_Excluded because it involves the provision of public goods_<br>_and is characterized by positive externalities. As such, it is_<br>_typically deemed to be of critical national interest across_<br>_countries, meriting state ownership._|
|R|Arts, Entertainment & Recreation*|15|7|_Some disaggregated sectors within this code are excluded_<br>_due to their not-for-profit nature, such as activities_<br>_performed by libraries and museums._|
|S|Other Services*|19|13|_Disaggregated sectors excluded from the analysis include_<br>_activities performed by entities that do not provide services_<br>_for profit and/or their purpose is not market production._|
|T|Activities of Households as Employers|3|0|_Excluded because it involves activities that are not priced_<br>_by markets._|
|U|Activities of Extraterritorial<br>Organizations|1|0|_Excluded because it involves the provision of public goods._|

_Source:_ Authors’ elaboration based on NACE Rev. 2 Industry Classification.

To classify the remaining 563 disaggregated sectors of the NACE Rev. 2 classification into the three categories described in section II, the proposed taxonomy deploys a decision tree. The decision tree includes three nodes (Figure 2). The first node identifies the natural monopolies by assessing whether or not the production function supports a market-efficient equilibrium with just one firm. Sectors in which higher efficiency is attained with just one firm are classified under the natural monopolies category (green). The second node of the decision tree assesses whether, even in the absence of a natural monopoly, structural barriers to competition exist that could result in market power. Wherever an oligopolistic market structure is identified, those sectors are classified under the partially contestable group (yellow). Finally, all sectors that are not placed in the partially contestable category based on market power considerations are assessed in the third node to determine whether they are characterized by positive externalities or other market failures that may result in under-provision or generate negative externalities on the rest of the economy. If this process identifies positive externalities that lead to underprovision, large negative externalities that cannot be corrected by a Pigouvian tax,<sup>27</sup> or other market failures, such as information frictions, the sectors are also included in the partially contestable category. All remaining activities for which no market failure can be identified are classified under the competitive category (red).

> 27 A Pigouvian tax is defined as a tax to correct inefficiencies of the price system that are due to negative external effects (Sandmo, 2008).

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