Are governments inefficient?
Whatever the government provides, it costs more than the private sector. Why do public services cost more? Should we privatise everything? Let's understand.
What is government doing about it? The recent rise of the left brings up this question often. Governments should provide
free vaccines, subsidized health care,
unemployment benefits, job guarantee, job reservations,
free education, education loan waivers,
food stamps, farm subsidy, minimum support prices for food procurement,
carbon-free, coal-free, non-nuclear free electricity,
and what not.
Many, like me, point out that governments are very inefficient at providing services. The question is WHY?
Governments are saddled with additional costs.
When a government enters the fray, it is spending someone else’s money. Therefore we need to bring in accountability and we end up adding the following costs:
Oversight cost: You don’t want people spending other people’s money without those people knowing if it was well spent. What keyboard should government buy? What computer? HP computer with Microsoft keyboard is cheaper than HP computer with HP keyboard. How should you spend for these items?
Equality cost: The government must treat everyone equally. If there is a high performer who should be promoted against a non-performer? If two companies offer the government the same deal, but it has been observed that one keeps its word and other is sloppy can you choose the straight one? You need to justify these decisions with proper paper work (in triplicate with three different coloured forms - I am kidding of course but you get the idea).
Fairness cost: The government must be fair. It seems weird but business are not fair - they expedite. To be fair, governments slow down. But then fairness gets traded. Some minister/senator may want a big manufacturing plant in his constituency rather than neighboring constituency.
Due process costs: Everything must be done by approved processes. This is corollary of the various things above. For example, if you are waiting for a non-emergency surgery and some fellow gets ahead of you in line it will be a problem.
Approval Costs: everything should be approved through proper channels. Some changes have to go to the level of Parliaments to get approved. These approvals comes in
Private Sector does not have those costs, they take risks with their own money, if they make mistakes they do not survive. Therefore, private sector is more nimble, lower cost and faster at servicing customers.
Then why not privatize everything?
Like everything we discuss in RightVIEWS, it is not that simple.
We can privatize if there is bargaining power parity between the public/consumers and the private enterprises offering those services.
Generally competition keeps the bargaining power imbalances in check. Thus we get better products at the best price. People vote with their money.
However, in some cases enterprises converge to monopolies or duopolies or there is extreme concentration of private service providers. In such cases government has to step in to neutralize the excess bargaining power held by such entities. Thus when YouTube demonetizes people, they have no recourse.
Therefore natural monopolies like highways, power plants and the likes are difficult to privatize. Any private entity that gets access to such assets tries to impose extractive prices on the people - (either in form of high costs or poor service).
In sum
Governments are good at some things. Private enterprises are good at others. WE must learn to differentiate between these two capabilities and choose wisely. There are however things that neither the government nor private sector can do effectively. We will discuss this in a later post. Please subscribe for more such posts.
I so appreciate your clear, simple, understandable explanations Rahul! Thank you!