The Provision of Goods and Services by the Public Sector

Abstract

As we saw in Chapter 11, in order to achieve a more efficient allocation of resources, the government has to intervene in the market economy. Such intervention may take the form of administrative regulation, e.g. by rent control and anti-monopoly measures, or simply influencing relative market prices, e.g. by indirect taxes and subsidies. Alternatively, the government may itself provide certain goods and services. Economic reasons for this direct provision are:

• 1. Community goods, such as defence, police, street lighting and flood control, have the following characteristics:

  • (a) they are indivisible in the sense that supply must be a complete package or nothing;

  • (b) one consumer’s use does not deprive others of its simultaneous use;

  • (c) once produced, the opportunity cost to additional consumers is nil;

  • (d) a price cannot be charged on the basis of use. This means that it is impossible to supply such goods through the market.

• 2. Collective goods, similarly, satisfy people’s collective needs, e.g. parks, motorways, bridges, water supply, refuse collection and drainage, but they are distinguished from community goods in that it is possible to exclude free-riders and so charge on the basis of use, eg. by entrance fees, tolls, meter recording, etc.

  But these goods entail such high fixed-capital investment that production takes place under conditions of decreasing cost. Some monopoly element is therefore inevitable (see p. 176), but while a private monopolist will endeavour to limit supply to where marginal cost equals marginal revenue, a public body can secure a better allocation of resources.