Corporate Provision Of Public Goods

Introduction

Over the years, there has been a considerable change when it comes to the division of responsibility between government and private individuals for the provision of public goods globally. In fact, in recent times, there has been a rapid increase in the involvement of the private sector for the provision of public goods. However, the growth in the private sector for the provision of public goods has resulted in an on-going debate and discussion about the extent to which it is possible to depend on the private individuals for the delivery of public goods (Besley & Ghatak, 2001). At the same time, one important issue related to the delivery of public goods has drawn considerable attention both in academia and in political circles. This issue related to the one simple question that is ‘who should deliver public goods? Even though this question sounds very simple and straightforward, surprisingly there lacks a satisfactory answer to this question.

Correspondingly, this essay attempts to answer this question by critically evaluating the advantages and disadvantages of the public and private provision of public goods. In this course of answering this question, the essay also attempts to discuss the rationale for government intervention in the markets and examines how government spending and taxation affect aggregate demand and supply.

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Advantages and disadvantages of public provision of public goods

The government intervention in the market has been subject to considerable debate in the UK among the politicians. Various literature in the past has provided different reasons for government intervention in the market for the provision of public goods. In this regard, one of the common reasons that are often being used for the justification of government intervention in the market is associated with ‘market failure’ Accordingly, market failure, in general, is defined as the failure of the market to allocate sufficient goods and services. Notably, public goods are the source of market failure. Public goods are important because it satisfies the collective needs. For example, street lighting, public roads, public parks and benches, national defence and police force all are public goods that are socially beneficial and are important for ensuring growth and stability of the economy (Cowen, 1992).

Various advantages of the public provision of public goods are identified. In this regard, one of the important advantages of public provision of public goods is that in certain circumstances market is unable to provide efficient quantity, which can produce negative externalities. To overcome these negative externalities, government intervention for the provision of public goods is important. Moreover, the government is the only body that has the resources and the authority to collect taxes in the country and use these taxes for providing public goods and services. At the same time, economic events such as recession and inflation have a devastating impact on the citizens of the country particularly the poor people. Accordingly, private individuals are more concerned with maximisation of their profit but are rarely concerned with social welfare or finding solutions to the problem faced by the general public. In such circumstances, the role of government in the provision of public goods is immense. For example, transportation and health care are the basic needs that are required by all individuals whether it is poor or rich. However, poor people cannot afford to buy private cars or pay the high cost of health care services provided by private individuals. It is, therefore, governed by spending on public transportation and health care ensure that everyone irrespective of their wealth can use it.

Another major advantage of a public provision of public goods and services is that it aids in lessening inequality. Accordingly, the government collects taxes from rich people that are used to pay for the goods and services that poor people cannot afford. In this way, it the public provision of public goods helps in reducing the inequality in an economy. Public goods have unique characteristics of being non-rivalry and on-excludable. It is, therefore, is no incentive for anyone to pay for the good and the marginal cost equates to zero (Kotchen, 2012). Also, it is essentially impossible for the market to deliver goods to people at free of cost since they are established with the objective of earning a profit for the maximisation of shareholders value. For example, public health care service is beneficial for all individuals and citizens of a nation regardless of the fact whether they are taxpayers or non-tax payers. Nevertheless, the private sector being a profit-oriented is more concerned with their profit rather than the public interest of meeting health care needs of the people in the society for free of cost. It is where the public provision of public goods and services is beneficial for the people.

It is apparent that public provision of public goods and services has several benefits and advantages, but it can be argued that there are certain limitations of public provision of public goods and services which is essential to evaluate critically to determine who should provide public goods. As per public choice theory, it is stated that politician is self-interested and thus they have other incentives for catering the public interest. In this regard, it can be argued that by serving the public interest the politician intends to gain and retain power. Also, can be claimed the government in power can use the tax revenue collected to favour a well-organised minority to appease them and buy votes. Also, another major limitation associated with the public provision of public goods is associated with the fact that public enterprises are inefficient (Sloman, 2007). In this regard, it can be argued that public enterprises largely operate under the influence of the politicians and thus they are more concerned with addressing the objectives of the politicians rather than maximising their efficiency. At the same time, it can be argued that when the public enterprise is involved in the production of public goods, they produced goods based on the desires of the politicians rather than customers. In other words, it is often claimed that government provides goods and services without acting on the information that it gets from the market force. (Sloman, 2007)

Moreover, provides public goods which are financed with the revenue collected in the form of taxes. In this context, it can be argued that such spending comes with opportunity cost which means such spending reduces the ability of the government to spend ton other projects. Also, public provision of public goods and services can also lead to unwanted behaviour. For example, if people learn that health care services are free, they may try to exploit it without any valid reason.

Advantages and disadvantages of private provision of public goods

It has been observed from the above-presented arguments that public provision of public goods has both advantages and disadvantages. Given the limitations of public provision of the public good, few commenters have suggested for private provision of public goods. However, similar to the public provision of public goods, private provision of public goods also has certain advantages and disadvantages. Accordingly, private provision of public goods can be argued to reduce the budget deficit in short-term as well as in medium term. It is an important advantage of the private provision of public goods because the government is usually faced with severe budgetary constraints. Also, studies on public provision of public goods have strongly stressed that public enterprise is less efficient in delivering public goods such as large infrastructure like highways. Correspondingly, it can be argued that the private provision of public goods such as infrastructure projects lends better efficiency than the public enterprise.

Moreover, unlike public enterprise where the politicians have significant control over their functioning, the private enterprise is usually less vulnerable to be influenced by any politician. This further has a significant impact on the efficient delivery of public goods (Morgan & Tumlinson, 2018). Also, the involvement of the private sector in the provision of public goods can be further argued to contribute to more competition in an economy. Correspondingly, such increased competition facilitates in the more efficient allocation of resources as the private enterprise's strong incentives to minimise cost and maximise profits (Vilkė, 2017). However, in the context of public enterprises, they are not subject to rigours competitive landscape which is one of the main reasons that induces inefficiency in public enterprises. In the case of private enterprises, they are faced with increased competition as every private entity strive to make more profit which forces them to ensure greater efficiency in delivering public goods and services (Rose et al., 2002; Bagnoli & Lipman, 1992).

Private provision of public goods has a greater edge over the public provision of public goods, particularly regarding efficiency. Nevertheless, it also has certain limitations which are worth to discuss to comprehend the private provision of public goods better. Accordingly, public goods and services such as highway and school projects are considered as natural monopolies as these projects have high initial capital cost (Cannadi & Dollery, 2004).

At the same time, competition is difficult to establish in areas of natural monopolies. Accordingly, such characteristics of public goods like water, electricity and schools often create risks where private involvement in the provision of such goods can result in abuse of monopoly power and hurt the public interest. In other words, it can be argued that profit maximising monopolistic private providers of public goods may attempt unwanted gain advantage of their market power and may supply goods at a higher price to earn more profit without considering the poor people (Cannadi & Dollery, 2004). Another major limitation of private provision of the public goods is that the quality of the goods provided by the private enterprise may decline as they may introduce cost-cutting measures to reduce the cost while maximising their profit. Also, intervention by the government is not only driven by allocative or dynamic efficiency, but it also relates to moral and ethics. Accordingly, government advocates that it is a moral duty to provide basic rights to the citizen. However, private enterprise is least concerned with the moral and ethical duty rather they are more interested in maximising their profit which is not Pareto optimal.

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Conclusion

In conclusion, this essay presented arguments related to the corporate provision of public goods. The key argument considered in this essay is” who should provide public good”? To answer this question and to draw a valid finding, advantages and disadvantages of the public and private provision of public goods has critically evaluated. Correspondingly, the evaluation of the advantages and disadvantages of the public and private provision of public goods revealed interesting finding. In this regard, it has been found that both public and private provision of public goods have certain advantages and disadvantages. The main advantages of public provision of public goods are that it reduces inequality and protect the interest of poor people adverse impact caused by natural economic events such as recession and inflation.

Nevertheless, public provision of public goods also found to have limitations. In this regard, major limitations of public enterprise in providing public goods are associated with its efficiencies. Accordingly, public enterprises are ascertained to be influenced by politicians who have self-interest and thus may not focus on public interest. On the contrary, the key advantage of a private provision of public goods is associated with the increased efficiency of the private sector to the public sector. However, it has further noted that since the private enterprise is more concerned with the maximisation of profit, they may be less motivated to address the problems faced by the people in the community.

Thus, based on eth findings obtained from the arguments drawn in the essay it can be stated that new form of an arrangement such as public-private partnership (PPP) can be suitable for the provision of public goods.

References

  • Bagnoli, M. & Lipman, B. L. (1992). Private provision of public goods can be efficient. Public Choice, 74(1), 59-78.
  • Besley, T. & Ghatak, M. (2001). Government versus Private Ownership Of Public Goods. The Quarterly Journal of Economics, 1343-1372.
  • Cannadi, J. & Dollery, B. (2004). An Evaluation of Private sector provision of public infrastructure in Australian local government. [Online] Available at:
  • Cowen, T. (1992). Public Goods and Market Failures: A Critical Examinations. Transaction Publishers.
  • Kotchen, M. (2012). Public Goods. [Online] Available at: [Accessed 26 October 2018].
  • Morgan, J. & Tumlinson, J. (2018). Corporate Provision of Public Goods. Academy of Management Proceedings, 1-65.
  • Mulder, A. (2004). Government Dilemmas in the Private Provision of Public Goods. [Online] Available at:
  • Rose, S. K. et al. (2002). The private provision of public goods: tests of a provision point mechanism for funding green power programs. Resource and Energy Economics 24, 131–155.
  • Sloman, J. (2007). Economics. Pearson Education India.
  • Vilkė, R. (2017). Provision of Public Goods and Corporate Social Responsibility Paradigm: Theoretical Insights. International Journal of Science and Engineering Investigations, 6, 2017.

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