The Concise Guide To Economics
by Jim Cox
17. Market vs. Government Provision of Goods
Its often heard that government is not as efficient as business. This is not a knee-jerk ideological reaction. It is grounded in the real differences of the incentives facing government and private enterprises.
In the market, a private enterprise is dependent on the flow of consumer dollars into the organization for its success. Thus a tight link exists between consumer satisfaction and business success. In contrast, a government enterprise has a second source of income available to it--tax revenues. With an alternate source of income to support it, a government enterprise will necessarily have a lesser incentive in serving consumers. Realize, this is not a matter of good people in management of private enterprises and bad people in management of government enterprises, but a different incentive structure in the two arenas.
Most people attempt to please their bosses on the job as a means of generating an income. Winning the lottery often reveals the employee's true underlying attitude toward working at the behest of the boss. Government enterprises have won the lottery, so to speak, and thus treat the consumer not as the end all and be all for the organization but as a nuisance interfering in the peace and tranquility of the day. Additionally, many government enterprises hold a legal monopoly relieving them of the fear of loss of customers to rivals, unlike private enterprises in a free market.
An easy example to illustrate these points is the U. S. Postal monopoly. With tax dollars available to make up for any shortfalls from consumer-derived revenues, the Post Office can afford to treat its customers as an unwanted interference. The Post Office is notorious for its lack of innovations. For instance, while private enterprises in the free market offer customers bags in which to secure their purchases (even in the case of minimally priced purchases) the Post Office does not bother to stock and offer bags to its customers regardless of the value of what they buy.
Advertisements in your Sunday newspaper will typically offer return address labels with a more expensive peel off option as well as a cheaper lick and stick option. Stamps until quite recently were lick and stick only. Why should the Post Office go to such trouble when the taxpayers make up losses and it's illegal for others to deliver first class mail?
Federal Express began offering urgent overnight delivery years before the Post Office. Why should the Post Office take chances on such innovations which may or may not pan out?
Fast food restaurants, banks, dry cleaners, liquor stores and other businesses offer drive-in service. But again, why should the Post Office take chances on such innovations which may or may not succeed?
But, the grand example which clearly illustrates these differences is late Fall with the approach of the Christmas buying season. While businesses take out ads virtually begging customers to shop with them--even late in the season--the Post Office is haranguing the hapless public to "mail early!" In effect, what the Post Office is spending money to do is to tell their potential customers not to bring their damned Christmas cards in for delivery at an inconvenient time. Customer satisfaction takes a back seat to the convenience of the Postal organization.
A further approach to these issues can be delineated as five significant differences between the two means of providing for consumers. First, the market provision of goods is based on a voluntary relationship between firm and customer. Government provision of goods is based on a coerced relationship between enterprise and customer. This difference alone is all the difference in the world as far as consumer satisfaction is concerned. It is the difference between employment and slavery, charity and robbery, seduction and rape.
A summary statement concerning market provision of goods is the well-know phrase, "the customer is always right." Notice there is no such similar phrase "the voter is always right", or "the taxpayer is always right" in describing the attitude of government enterprises.
Second, in the market there is proportional representation; that is, consumers get the goods they "vote" for in proportion to their "votes." If ten percent demand green cars then ten percent will get green cars. With government provision it's a winner takes all deal; either we all have the Social Security program or none of us have it, regardless of our preferences.
Third, in the market there are small individual choices. Just because you buy a Sears refrigerator does not mean you then have to buy a Sears washer and dryer and tv, etc. With government provision, there is a package deal arrangement. Mixing and matching is unavailable with government provision of goods. It's either Bill Clinton's policies on taxes, the environment, and foreign policy or it's Bob Dole's policies on these issues.
Fourth, choice in the market is continual. One can replace unsatisfactory goods at any time. Tired of the car you thought would be so great? Sell it and get a different model. No longer happy with your detergent, buy a different brand. Realize the first brand was good after all? Re-replace it at your discretion. Now compare this to government. Want to drop out of the Social Security program--go to jail. Tired of the president. Four more years.
And fifth, a private firm is held liable for damages to those it may harm. Suing companies for compensation is the norm. Government enterprises often enjoy "sovereign immunity," placing them above reproach (an ill carried forward to America from the European theory that the king could do no wrong). Government enterprises can and do wreak havoc with peoples' lives without suffering any financial consequences. In a real sense it is dangerous to have government enterprises providing consumer goods since an absence of potential liability will result in a reduced emphasis on safety. Private firms facing potential liabilities for their damages have a financial incentive to be safe.