Question

In a 3-4 page essay please discuss the following, taking care to cite your readings and research:

1. Describe the ways that the public sector and the private sector are different and how public sector and private sector management are alike.

2. Describe the difference between public goods and private goods, using some examples and examples of externalities. Why do governments provide public goods? Does the private sector ever get involved in the provision of public goods? Provide an example and explain.

Answer 1

1. Public and private sector financial management differ in many ways, some of the more significant being differences in scale, risk tolerance, managerial turnover, reliable benchmarks and rewards for excellence.

There are several more easily identified differences, many of them explained by the fact that public sector management and private sector management have fundamentally different purposes, but also because of the ways in which public and private sector managers come to manage.

Although some of the best run corporations have public impact and purpose, private sector financial management is primarily for the benefit of corporate stockholders.

On the other hand, when it functions as it should, public sector financial management is for the benefit of all citizens_._ The kind of advantage a public corporation seeks to have over its competitors isn't deliberately amoral, but it can sometimes have consequences that adversely affect the public.

Unless those consequences stem from deliberate negligence, generate a lot of negative publicity or do something else that hurts the corporate brand, stockholders are often slow to address them.

These two fundamentally different purposes underlie many of the differences between public and private sector financial management.

cale: By far the largest U.S. corporation is Walmart, with 2.2 million employees, which is about the same number employed by the federal government, not counting another 1.3 million in the armed forces. Most corporations, however, are much smaller; about half employ 500 people or less.

Risk tolerance: Financial management in the private sector encourages some degree of risk-taking. Many of the largest and most successful U.S. corporations, among them Disney, Apple and Facebook, were started by individual entrepreneurs with little experience or capital who took chances and beat the odds (while about half of all businesses fail in the first five years).

Taking that kind of risk in government is virtually unthinkable. California has tried for 10 years to move its high-speed rail project to completion.

Its relatively modest goal is to develop a rail system just a little slower than European railroads that have been in service for decades, but it has met with widespread protests and at least six lawsuits that have resulted in political compromises and successive downscaling of the overall plan.

Reliable benchmarks: In the private sector, establishing reliable financial benchmarks is relatively straightforward. Often, these begin with a communication from the CEO, either to the media or at a stockholders' meeting.

Once the benchmark has been established – a 15 percent year-over-year increase in profit for the next three years, for example – it becomes the responsibility of everyone in the corporation to work to achieve those goals. The two-party system in the U.S. makes agreement on benchmarks difficult, and, as was the case with the Affordable Care Act introduced during the Obama administration, the opposing party can work to prevent success.

Another difference in the establishment of private and public sector benchmarks is that in the private sector, these benchmarks are almost always primarily financial. In the public sector, this is almost never the case; even the establishment of benchmarks that seem financially grounded – the reduction of government debt, for example – may turn out to be determined primarily by political interests.

Rewards for excellence: The highest paid federal employee is the president, who receives a salary of $400,000. There are no performance bonuses or stock options. In 2017, the highest paid executive, Walmart CEO Marc Lore, received total compensation of just under $237 million.

As is typical among private sector executives, his salary of $346,154 was a very small component. Almost all of Lore's total compensation was in the form of bonuses and awards related to financial performance.

2. A pure public good is a good or service that can be consumed simultaneously by everyone and from which no one can be excluded. A pure public good is one for which consumption is non-revival and from which it is impossible to exclude a consumer. Pure public goods pose a free-rider problem. A pure private good is one for which consumption is rival and from which consumers can be excluded. Some goods are non-excludable but are rival and some goods are non-rival but are excludable.

The first feature of a public good is called non-rivalry. A good is non-rival if consumption of one unit by one person does not decrease available units for consumption by another person. An example of non-rival consumption is watching a television show.

A private good, by contrast, is rival. A good is rival if consumption of one unit by one person does decrease available units for consumption by another person. An example of rival consumption is eating a burger.

The second feature of a public good is that it is non-excludable. A good is non-excludable if it is impossible, or extremely costly, to prevent someone from benefitting from a good who has not paid for it. An example of a non-excludable good is national defence. It would be difficult to exclude a foreign visitor from being defended.

A private good, by contrast, is also excludable. A good is excludable if it is possible to prevent a person from enjoying the benefits of a good if they have not paid. An example of an excludable good is cable television. Cable companies can ensure that only those people who have paid the fee receive programmes.

Public goods are those goods and services provided by the government because a market failure has occurred and the market has not provided them. Sometimes it is in our benefit to not allow for a market provision. In the case of police, national defense and public education it can be argued that private provision of these services would be less desirable for a variety of reasons.

Public goods are economic products that are consumed collectively, like highways, sanitation, schools, national defense, police and fire protection.

All members of society should theoretically benefit from the provision of public goods but the reality is that some need them more then others. For example the wealthy do not need welfare and the elderly still pay for school taxes. This leads to the inevitable argument about paying for public goods taxes!

Our society, depending on locality, has provided such public goods and services as public education, sanitation, police services, fire protection, libraries, infrastructure maintenance (roads, bridges, communications networks, etc..) and street lighting. Since we live in a market economy whenever we decide to provide a good or service publicly we must answer a variety of questions such as:

• Is its use available to all. ex. Street Lighting.
• Does it provide for public health and safety. ex. Police, Military
• Does it provide for the general welfare of society. ex. Education
• Should the services be provided by both public and private means. ex. Sanitation, water.

Limited-access highways are no problem. Private highway builders can erect tollbooths at entrances and exits and charge for use of their roads. No free riders will thwart builders’ efforts to collect payment from willing customers.

Local city streets are different. Having tolls at each intersection seems awfully inconvenient.

Columbia, Maryland, and Reston, Virginia, provide more recent examples of cities whose infrastructures were built and supplied privately. In both cases, private developers—James Rouse in Columbia and Robert Simon in Reston—planned and constructed the streets, sewer lines, and parks. They then sold real estate that included a prorated portion of the infrastructure’s cost.

Obviously these developers also had incentives to provide high-quality infrastructure. Were the streets too few, the park too small, the sewer lines too narrow, the maximum prices that buyers would pay for homes in these towns would have been lower.