How can the government avoid public sector failure?

Readers Question: how can the government avoid public sector failure?

Firstly, it makes a change to consider a question like this. Usually, the question is – Why is the government inefficient? Why do we get government failure? Should we privatise public services? But, here we can examine whether the tendency to government failure can be overcome.

Public sector failure/government failure

Public sector failure occurs when government intervention in the economy leads to an inefficient allocation of resources and leads to an overall decline in economic welfare. Government failure can occur for various reasons, such as.

  • Lack of profit incentive in the public sector. People working for the government may not have the same profit motive to cut costs / work hard/ increase efficiency. Therefore, this causes the government sector to be inefficient compared to the private sector.
  • Greater bureaucracy in public sector.
  • The conflict between political and economic objectives.

How can the government avoid public sector failure?

1. Introduce profit incentives/performance targets into the government sector.

There is no reason why those working in the public sector can’t be given performance targets. For example, schools can be given targets to achieve minimum exam standards and climb up the league tables of exam performance. People working in the public sector can be paid piecemeal – rather than per hour. For example, rather than pay refuse collectors £8.00 an hour. They could be paid £64 a day to do a job estimated to take 8 hours. This gives them an incentive to work faster and not dawdle on the job.

Evaluation. It can be difficult to introduce the profit motive into many areas of the public sector. For example, education and healthcare do not lend themselves so well to performance targets and profit motives. Schools which target better exam results may do so at the cost of excluding less intelligent pupils. They may sacrifice other aspects of an all-rounded education to get better exam results. Managers in a hospital may be able to cut costs, but the consequence may be to put greater pressure on nurses and doctors – it may compromise the standards of health care.

The problem is that the government tends to get involved in public services which are either not provided by the free market or are under-provided (e.g. merit goods and public goods). The problem of these public services is that they are not natural profit oriented industries.

2. Competition

One thing the Conservative government did in the 1980s was to introduce competitive tendering for many public services. This meant local councils lost their monopoly provision of public services, such as school meals and refuse collection. Council services could still bid to run refuse collection. But, if a private company offered a better service, then they would lose out to the private sector. The argument is that the threat of competition creates incentives for the public sector to act like a private company and cut costs.

  • Evaluation. The problem with competitive tendering is that the cheapest service may not be the best.  A private company may offer to provide school meals for a cheap cost but at the expense of reducing the quality of food. Therefore, you reduce costs, but you have a decline in standards. A government body then needs to be responsible for checking standards of service.

Many public services are natural monopolies, therefore, competition is hard to introduce. If you get the right to run a refuse collection for five years, a private company effectively has a private monopoly for five years.

In the 1980s, public bus companies lost their legal monopoly and competition was introduced, with private companies such as Stagecoach entering the market. However, this means that there is often an overlap and duplication of bus services, leading to increased congestion. Also, with private companies, fare increases lead to higher profit for private companies, rather than benefiting the local council.

3. Public-private partnerships

Another policy is to try and encourage public-private partnerships. This means that for a project, the government try to involve the private sector. The private sector pays part of the cost and brings expertise and the incentives of the private sector into the project.

The downside is that private companies tend to cherry-pick projects. They benefit from government investment, but they get the profit rather than the government.

4. Rely on good-will

Some public services are sectors of the economy where the usual profit motivate is not all dominant. For example, most doctors, nurses and healthcare workers choose their profession – not to maximise earnings but to gain satisfaction from serving patients. What healthcare professionals need is not performance related pay, but working conditions conducive to good morale. If staff are overworked or have too much paperwork – this can lead to poor morale. Reducing bureaucracy and creating a well-funded health care system is a powerful way to get the most from government funds. It is a similar situation in education, with many teachers over-worked from filling in forms.


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