When and how can policy makers in government rely on private market? What impact does it have on the effectiveness of public service provision? In what situation govt rely on PPP. Researchers have found ten different reasons for relying on private market instead of public sector, they are as follows:
Difference in competition. Competition is at work in both government and private markets, but the competition in markets is more civil and evenhanded. Business competition is similar to golf. Each competitor works to improve his own performance. Political competition-between parties, between candidates for office, and among legislators-is more like basketball. While a competitor works to elevate his own game, participants also attempt to undercut, debilitate, and intimidate opponents. It is common to see political advertising that is hostile, even to the extent of lying about the opponent. Combative ads are the exception in business appeals to consumers.
Enterprise expansion. In private markets, a business venture has to be profitable to expand, whereas expansion is "in the DNA" of government ventures and programs. Program beneficiaries and bureaucratic suppliers work in collaboration with elected politicians to expand particular government programs. The basic idea is this: If a government program is good, an expanded program would be even better.
Enterprise contraction or elimination. Business enterprises that incur chronic losses must either change or die. In contrast, "government program elimination" is almost an oxymoron. The political alliance that works to expand a government program can almost always fend off efforts for cutbacks or elimination. The market process, meanwhile, is a "sorting out mechanism" based on loss and profit. The life of any business venture is always tentative.
Gradations of success. Few industries are dominated by one or two firms. Instead, many participants compete, success is measured by small gains in profits and market shares, and there can be multiple winners. For political elections and legislative votes, however, it is "winner take all." With a 49 percent vote in an election, you are a loser. The thin margins for many political outcomes make elections and legislative battles rather brutal affairs.
Product diversity. Product differentiation is pervasive as businesses try to appeal to new consumers. Different businesses try to cater to different market segments, resulting in wide consumer choice. Government provision of a product or service tends toward "one size fits all."
Sources of evaluation and accountability. Market accountability is "bottom up" from consumers, with diverse criteria of evaluation. Government accountability is "top-down" based on the discretion of political authorities. Performance measures are rather narrowly defined, as with high-stakes testing for K-12 education in "No Child Left Behind."
Consumer knowledge. Individuals tend to be more knowledgeable about their market choices than about their government choices-for both candidates and policy issues. The reason is that a consumer gets to make decisions for him- or herself. With government, a citizen just gets to "weigh in" with a vote, a contribution, or phone calls to legislators. A citizen's influence on political outcomes is highly diluted and may be regarded as nil, diminishing citizen incentive to become informed. Moral responsibility is always enhanced by a close connection between actions and consequences; the political process weakens this connection. What economists call "rational citizen ignorance" is woven into the fabric of elections and public policy debates.
Influence of the ignorant. Rationally ignorant citizens are often decisive in politics. In a tight election contest, the ad wars in the days prior to the vote are focused on the less knowledgeable voters. The more informed citizens of the left, right, and middle have already decided. The stage is set for the ill-informed, perhaps a fourth of the electorate, to determine the election result. In contrast, private sector suppliers must cater to the more knowledgeable "voters." For instance, a computer producer caters to computer geeks and purchasing executives at Walmart and Best Buy rather than attempting to take advantage of the poorly informed. Computer purchasers who know very little about gigabytes benefit from the dominant role of knowledgeable buyers.
Time horizon for decisions. Business management tends toward balanced consideration of short-term and long-term impacts. Even if a business owner expects to sell out shortly, the owner wants the enterprise to have healthy long-term prospects so as to fetch a high selling price. For our national government, elections can be no more than four years away for a president, two years for a representative, or six years for a senator. As a result, government decision-making tends to emphasize short-term costs and benefits relative to long-term impacts. Social Security and Medicare reform remains on the backburner because long-term solutions involve significant short-term sacrifice.
Cost control. Since we are in the grip of exploding federal deficits and debt, my No. 1 reason for concern about government is its inability to control costs. For the private sector, the profit motive means that managers are always in tune to avoiding unnecessary expenses and to controlling costs of production. Effective resource management translates to higher business profit. Profit is no part of the equation in the legislative process or in bureaucratic management. Rather than limiting costs, bureaucratic managers will spend every dime appropriated. And legislators are generally inclined to fund bloated budgets. "Cost-effective government" is an oxymoron.
No confidence level-industrializaton
Private don't want
In what sector govt can't rely on private sector.
In my opinion, government can't rely on defense system, Judiciary,
What impact on
Cost effectiveness
Deliveries
Sustainable
Pollution, ribery
Positive impact
time delivery quality
Over time, these privatization efforts have expanded, from mining and transportation into telecommunications and electrical utilities. Even in the provision of social services, an area that has long had a tradition of extensive government involvement, there is a movement toward privatization.
The wave of privatization and deregulation efforts in other sectors of the economy have led individuals to look for additional areas where such reforms may be applied. A public debate about low quality in some publicly-provided services (such as public education or welfare services) has led some to consider privately provided services as a possible alternative. Finally, the strong current concern with cost control in public budgets has led policy-makers to look for potential budget savings; as the social service sector takes up a significant fraction of public budgets, it has been scrutinized for ways to provide greater efficiency.
The public sector is much more heavily involved in the financing of health care than in the
ownership of hospitals, providing 62 percent of all hospital revenues, much of it through publiclyoperated health care programs. In contrast, the public sector is less involved in the financing of
higher education, providing only 38 percent of the revenues, although 78 percent of students
attend publicly operated universities or colleges.
Alternative Models for the Provision of Social Services
One of the characteristics of the social service sector is the prevalence of various forms of
market failure. Indeed, one way to define "social services" is to characterize them by the
following market attributes.
Externalities. Many social services generate benefits and costs that are greater than those
accrued by the specific recipient of the services. Private markets are unlikely to take these
benefits and costs into account, underproviding services which generate social benefits beyond the
benefits received by the individual. For instance, ineffective or poorly run prisons may increase
the probability of criminal behavior among prisoners after they are released, imposing costs on the
larger society. Effective elementary education may benefit the entire society by assuring more
literate and numerate future workers, raising productivity and (it is often argued) improving
citizen awareness in a democratic society.
Informational Asymmetries. Effective private markets presume fully-informed consumers
making choices. In many social service areas, it may be difficult for the recipient to judge the
quality of the service provided. There are several reasons for this. Many social services are
complex, with multi-faceted inputs and outputs. For instance, this is surely true of education or
hospital care. In addition, some social services are hard to monitor, such as nursing home care or
child foster care. Some services may be only infrequently purchased, such as many health
procedures, which limits the information consumers have about them. All of these issues create
asymmetries in information, and limit the ability of the recipient of the service to fully identify its
quality.
Agency Problems. In many social service areas the recipient of the service may have a
limited capacity for choice and is often not the actual decision-maker. For instance, young
children are not able to make serious decisions; very ill or incapacitated persons may be in the
same situation. For somewhat different reasons, prisoners in the criminal justice system are also
without agency or choice. In these cases, the person making decisions is likely to be someone
other than the recipient. While in some cases, the decider may have only the best interests of the
recipient in mind (i.e., many parents care deeply about the quality of their children's education), it
cannot be assumed that the best interests of the recipient will always be maintained by another
individual. In this case, the private market decisions of the decider may not produce optimal
outcomes for the recipient.
Distributional Concerns. Distributional issues are often a fundamental reason why private
market outcomes are considered inadequate in the social service area, particularly if some people
have limited incomes and are thus excluded from certain markets. At one level, this may imply a
concern about access. For instance, Tobin (1970) discusses the principle of "specific
egalitarianism", the view that some scarce commodities (health care, education, access to justice)
should be distributed less unequally than the ability to pay for them. A stronger level of concern
relates to equity in the receipt of services. In this case, it is not just access to but the equal or
universal provision of a service that is desired. For instance the difference between these two
distributional perspectives is highlighted by the debate in the United States between those who
think publicly provided health insurance should guarantee access to a minimal set of health care
services for low-income families versus those who want the government to provide similar levels
of insurance to all citizens.
In many social service areas, these four problems occur in tandem. It is not difficult to
name a variety of areas (education, health, child care, welfare) in which there are externalities,
informational failures, distributional concerns, and potential agency problems all at the same time
(i.e., see the discussion in Poterba, 1996). In these cases, as a body of literature in economics has
indicated, the standard economist's presumption in favor of the unregulated private market will no
longer hold and government involvement in one form or another may result in a better outcome
(Sappington and Stiglitz, 1987; Greenwald and Stiglitz, 1986).
There are, however, many ways for the government to be involved in the provision of
social services, and simply saying that there are market failures does little to indicate exactly what
type of government involvement may be optimal. At least four broad alternative models may be
identified.
Private ownership and management with government regulation. This is the model
utilized in many sectors of the economy in which there are problems of market failure that can be
readily corrected by government regulation. For instance, the externalities related to emissions of
dirty water or smoke are corrected through various regulatory schemes; or informational
problems in financial markets are dealt with through mandatory disclosure rules. If effectively
implemented (this is an important and often unmet caveat), such regulatory schemes can produce
a more optimal outcome than would the unregulated market.
Private ownership with (perhaps) government regulation and government funding to
subsidize low-income clients. This is the standard "voucher" model, in which the government
provides some redistribution of income among potential recipients, but the recipients themselves
contract for services in the private market. For example, Section 8 housing vouchers in the
United States provide low-income families with a subsidy that they can use for rental housing
(subject to certain quality standards.) Food Stamps provide a voucher for low-income families
that can be used to purchase additional foods at the grocery store. These voucher programs solve
distributional concerns by providing access to low income families without interfering with the
efficiencies of the private market.
Government ownership, with contracts to the private sector for the management and
operation of the service. This type of shared public/private responsibility is typically what
"privatization" in the social service area refers to. It is the way privatized prisons and privatized
job training programs operate. As we will discuss below, a key issue in this approach is whether
or not the government can write complete contracts with the private sector, to assure that the
desired quality of service is provided and/or that full access is provided to all groups. Note that
the government can implicitly redistribute income in this situation by funding the private
contractor to assure that the service is available to all groups.
Government ownership and government management. In this case the government
makes all operating decisions and government employees typically provide the service.
Traditionally, prisons, schools, and welfare services have been provided in this way.
The next section provides a framework for deciding what level of government involvement
may be most appropriate.
