Comparison Between Public And Private Sectors
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COMPARISON IN THE WORKING OF PUBLIC SECTOR AND PRIVATE SECTOR COMPANIES (Neglect of Lessons of Economics in Indian Policy Formulation)
“The choice between public sector enterprises and private firms is not a simple question. While there are eminently good reasons for promoting public sector production under certain circumstances, nevertheless there is no basis whatever for the doctrine of the so called commanding heights. The Indian economy is struggling in the deep swamps of inefficiency trap can be vastly facilitated if both the public sector and private firms are exposed more and more to global competition and the arbitrary bureaucratic controls for the regulation of entry and freedom of exit of firms are substantially rolled back.” Written byB.S Minhas.
Today I am here to present a brief study on the comparison in the working methods of public sector and private sector companies which would conclude the mechanisms that led to the success and failure of the former and the latter since 1980.
INTRODUCTIONThis is a world of welfare maximisers (consumers) and surplus maximisers (firms). When the consumer in his given budget constraint is unable to increase his welfare and the all the markets are cleared, then at this set of prices, inputs and outputs constitute a situation of competitive equilibrium. As a formal description, this is applicable to a capitalist system of economy.
Studying the real world, at a particular stage of the development of an economic system, the price market arrangements for some goods and factors of production may not emerge. Markets for insurance and capital, for instance, in most developing countries are incomplete. Even if markets do exist, they may fail. Approaches towards mending them are fairly well known: Economic Science. This has developed a convincing theory of market failure- not properly appreciated by the politicians and bureaucrats.
Since market failure has to be recovered to uplift the economy to the level of competition equilibrium, we studyTHE REASONS FOR MARKET FAILUREThis arises due to1. Natural Monopoly ConditionsIt may emerge naturally when the fixed costs of producing a good are high relative to the variable costs, leading to decline in the average cost of production over the relevant range of demand. In such a case a single firm can produce the good at lower cost than any other market arrangement even in competition. The price elasticity of demand for such a good will determine whether or not the natural monopoly should invite the public intervention. If the price elasticity of demand is less than one, an increase in price will increase total revenue a natural monopoly in this case would result in higher prices and lower output than under competitive conditions. Therefore the system would suffer from allocative inefficiency and loss of social welfare. Examples: water supply, telecommunications. 2. ExternalitiesAn externality (diseconomy) is any valued impact (benefit or cost) resulting from an action that affects someone who did not fully consent to it. The current production
problems of an economy could be satisfactorily sorted through the market mechanism, but the externalities arising from intertemporal dependence among firms in different sectors could affect growth of investment in a developing economy, guided by the prevailing price system.
3. Informational DeficienciesIf the economic agents can determine the characteristic of every good with certainty prior to its purchase then the information contained in the prevailing set of prices is likely to lead to an appropriate allocation of resources. However, if the economic agents can determine the characteristics of a good only after its purchase and then use the informational deficiencies, it is likely to lead to allocative inefficiency. This can lead to failure in the price market. Example: diffidence of Indian peasants in relation to consolidation of their fragmented land holdings.
Market Failure and Government InterventionDetecting the presence of market failure may be considered an easy matter but the task of policy interventions is indeed complicated. Administrative costs of policy interventions are often difficult to fathom in advance. The conditions of market failure sin a sector, the dilemma is often sought to be resolved through direct entry of the government in the production of goods and services produced by such a sector. However, such market failure can also be addressed with much less intrusive policies.
We have well worked out the reasons for market failure and studied a convincing theory of the same. However, an equally convincing theory of bureaucratic (government) failure is yet to be studied. The real confusion which creates most problems in the study of public verses private sector arises from the fact that we have no overreaching theory that can facilitate
the analysis of trade offs between market failure and bureaucratic failure. The social costs of market failure condoned through government-in-action, cannot, therefore, generally be weighed up against the uncertain costs and harmful sides effects which bureaucratic activism in the market might entail. This makes it difficult to figure out and evaluate the pay-offs associated with different combinations of market outcomes and direct government intervention in policy formulation.
MARKET FAILURE AND PUBLIC SECTOR PRODUCTION-
“The choice between public sector enterprises and private firms is not a simple question. While there are eminently good reasons for promoting public sector production under certain circumstances, nevertheless there is no basis whatever for the doctrine of the so called commanding heights. The Indian economy is struggling in the deep swamps of inefficiency trap can be vastly facilitated if both the public sector and private firms are exposed more and more to global competition and the arbitrary bureaucratic controls for the regulation of entry and freedom of exit of firms are substantially rolled back.” Written byB.S Minhas.
Today I am here to present a brief study on the comparison in the working methods of public sector and private sector companies which would conclude the mechanisms that led to the success and failure of the former and the latter since 1980.
INTRODUCTIONThis is a world of welfare maximisers (consumers) and surplus maximisers (firms). When the consumer in his given budget constraint is unable to increase his welfare and the all the markets are cleared, then at this set of prices, inputs and outputs constitute a situation of competitive equilibrium. As a formal description, this is applicable to a capitalist system of economy.
Studying the real world, at a particular stage of the development of an economic system, the price market arrangements for some goods and factors of production may not emerge. Markets for insurance and capital, for instance, in most developing countries are incomplete. Even if markets do exist, they may fail. Approaches towards mending them are fairly well known: Economic Science. This has developed a convincing theory of market failure- not properly appreciated by the politicians and bureaucrats.
Since market failure has to be recovered to uplift the economy to the level of competition equilibrium, we studyTHE REASONS FOR MARKET FAILUREThis arises due to1. Natural Monopoly ConditionsIt may emerge naturally when the fixed costs of producing a good are high relative to the variable costs, leading to decline in the average cost of production over the relevant range of demand. In such a case a single firm can produce the good at lower cost than any other market arrangement even in competition. The price elasticity of demand for such a good will determine whether or not the natural monopoly should invite the public intervention. If the price elasticity of demand is less than one, an increase in price will increase total revenue a natural monopoly in this case would result in higher prices and lower output than under competitive conditions. Therefore the system would suffer from allocative inefficiency and loss of social welfare. Examples: water supply, telecommunications. 2. ExternalitiesAn externality (diseconomy) is any valued impact (benefit or cost) resulting from an action that affects someone who did not fully consent to it. The current production
problems of an economy could be satisfactorily sorted through the market mechanism, but the externalities arising from intertemporal dependence among firms in different sectors could affect growth of investment in a developing economy, guided by the prevailing price system.
3. Informational DeficienciesIf the economic agents can determine the characteristic of every good with certainty prior to its purchase then the information contained in the prevailing set of prices is likely to lead to an appropriate allocation of resources. However, if the economic agents can determine the characteristics of a good only after its purchase and then use the informational deficiencies, it is likely to lead to allocative inefficiency. This can lead to failure in the price market. Example: diffidence of Indian peasants in relation to consolidation of their fragmented land holdings.
Market Failure and Government InterventionDetecting the presence of market failure may be considered an easy matter but the task of policy interventions is indeed complicated. Administrative costs of policy interventions are often difficult to fathom in advance. The conditions of market failure sin a sector, the dilemma is often sought to be resolved through direct entry of the government in the production of goods and services produced by such a sector. However, such market failure can also be addressed with much less intrusive policies.
We have well worked out the reasons for market failure and studied a convincing theory of the same. However, an equally convincing theory of bureaucratic (government) failure is yet to be studied. The real confusion which creates most problems in the study of public verses private sector arises from the fact that we have no overreaching theory that can facilitate
the analysis of trade offs between market failure and bureaucratic failure. The social costs of market failure condoned through government-in-action, cannot, therefore, generally be weighed up against the uncertain costs and harmful sides effects which bureaucratic activism in the market might entail. This makes it difficult to figure out and evaluate the pay-offs associated with different combinations of market outcomes and direct government intervention in policy formulation.
MARKET FAILURE AND PUBLIC SECTOR PRODUCTION-
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