Public Sector

The public sector distinguishes itself from the private by allocating resources via collective choices. Consider, for example, goods and services such as public transportation, infrastructure, and police protection. Unlike goods and services such as foodstuffs or lawn care, those directed via the public sector often do not have an explicit price attached to them (or user prices do not match associated costs). Instead, whether a community receives a light rail line, new bridge, or increased police patrols depends in significant part on the capacity for that community's members to produce political support. Others, such as organized interests, may also attempt to sway such allocation processes but do so in a manner that avoids a system of explicit prices. Even in “market” economies such as the United States, the public sector directs over 40% of national resources in this manner.

What's more, even private goods and services such as foodstuffs and lawn care rely (at least indirectly) on the public sector for their direction. Indeed, without institutions that define and enforce the “rules of the game,” explicit prices that appear to direct private allocations would be impotent. Why, for example, would individuals pay the asking price for groceries if prospective retribution for stealing was negligible? In this light, the public sector appears to allocate all of an economy's resources, whether it does so directly or indirectly.

One's standing in the market sector can be very different from that in the public sector. As a consequence, determining [Page 472]which goods and services are allocated via the public and market sectors has anything but trivial consequences. Consider, for example, health care's allocation. Although developed countries tend to regulate their health care sectors rather heavily (that is, compared with their regulation of other sectors), significant cross-country differences exist. In the United States, for example, the health care sector receives relatively light regulation (at least from a comparative perspective). As a result, the capacity for individuals to pay for health care services in pecuniary terms (dollars) appears to exert a magnified influence on the quantity and quality of health care that individuals receive. The capacity for individuals to pay for services in nonpecuniary terms (for example, waiting time), in contrast, appears to exert a relatively small influence.

Although calls for public sector control frequently abound when market sector allocations produce unpalatable disparities (that is, unpalatable to at least a vocal minority), public sector allocation mechanisms need not induce superior results. Indeed, to the extent that organized interests exert “undue influence” on public decisions, it would be difficult to rationalize how moving a transaction from the market to the public sector would “improve” matters. This possibility certainly does not imply that moving allocations from the private to the public sector cannot improve welfare—it can. Rather, it simply implies that the manner in which the private and public sectors interact is complex and can thus produce inferior outcomes from even well-intentioned policy interventions. Although the public sector is, in some sense, more fundamental than is the private sector, understanding how interested adversaries stand in the private as opposed to the public sector is nevertheless important.

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