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 by-

B.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.

INTRODUCTION-

This 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 study-

THE REASONS FOR MARKET FAILURE-

This arises due to-

1. Natural Monopoly Conditions-

It 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. Externalities-

An 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 Deficiencies-

If 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 Intervention-

Detecting 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-