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Ownership and motives in providing goods and services are the main differences between the private sector and the public sector. While private companies strive for profit, public entities focus on providing essential services for the greater good. Despite their contrasting goals, both sectors work in tandem within mixed economies, the most common economic system today.
What is a mixed economic system? What is the difference between the private sector and the public sector? This article breaks down the characteristics of each sector, explaining their roles and how they contribute to a healthy and prosperous economy.
A mixed economic system defined
As the name suggests, a mixed economy combines a free market economy and a command economy. Almost all countries adopt this economic system but with different tendencies. For example, countries like the United States are more inclined towards the free market. Meanwhile, a country like China is closer to a command market economy.
Under a command economy, the government decides everything about allocating economic resources. It answers three basic questions of economics: what goods and services are produced? How to produce them? How to distribute them among the population. Under this economic system, the private sector does not develop.
In contrast, the private sector plays a significant role in allocating resources under a free market economy. As a result, the market mechanism works freely – without government intervention – to answer the three basic economic questions above. Demand works on the consumer side, and supply works on the producer side. The two meet in the market to determine what is best for each other (equilibrium).
Private sector defined
The private sector refers to the part of the economy under the control of individuals and businesses. This sector’s main motive is profit and maximizing the wealth of its owners or shareholders.
As we have seen, some businesses own other businesses. But, if we examine further, the ultimate owner of a business is ultimately an individual.
Then, when we discuss macroeconomics, economists divide the private sector into the household sector and the business sector. The household sector acts as a consumer in the product market and a supplier of resources in the factor market. Meanwhile, businesses act as producers in the product market and consumers in the factor market.
Public sector defined
The public sector refers to the part of the economy under the government’s control and ownership. It includes all levels of government—such as central, local, and state governments—plus government-controlled companies.
It excludes private companies and households because it belongs to the private sector. In addition, voluntary organizations such as charities and other non-profit organizations are excluded but are included as a third sector (voluntary sector).
The public sector is not-for-profit and focuses on providing services to the public to obtain the same benefits. For example, the sector provides public goods in which the private sector is reluctant to participate because it is not profitable. However, they are available to all parties (payers and non-taxpayers), and one party cannot exclude the other from benefiting.
Difference between the private sector and the public sector
The difference between the private sector and the public sector extends beyond just their ownership and motives. It encompasses several aspects, such as the types of organizations within them, who owns them, their motives, and what goods and services they provide. Another differentiating factor is where their financing sources come from, where they operate, the characteristics of the jobs in both, and how significant the incentives are to be more efficient and productive.
Organizational ownership
The ownership of the organization is the main distinguishing aspect between the private and public sectors. The private sector is owned and controlled by individuals. While a private company can own shares in another company, its ultimate owners are individuals. It can be through direct ownership, companies, or other non-governmental organizations.
In contrast, organizations in the public sector are owned and controlled by the government and provide goods and services to the public.
Organization type
Organizations in the public sector may include:
- Government organizations at all levels, including central, state, local, county and city governments.
- Government agencies such as ministries or departments which assist the central government in carrying out its activities.
- Public purpose organizations, such as national libraries, are established by the government to serve the public.
- State-owned enterprises that participate in commercial activities but are owned and controlled by the government usually operate in strategic sectors such as electricity, transportation, and telecommunications.
Meanwhile, businesses in the private sector include small-scale businesses and private limited companies as well as giant public limited companies such as Google, Microsoft, and Apple. They operate in various business sectors, such as manufacturing, retail, and technology.
Business organizations in the private sector can be sole proprietorships, partnerships, private limited companies, and public limited companies.
- Sole proprietorship ownership belongs to one person who has unlimited liability, including the potential for loss of personal assets to pay off business debts.
- Partnerships are owned and controlled by two or more owners (partners). They share resources and responsibility for business operations and finances. In general, they have unlimited liability. But, in the specific case of a limited partnership, some partners have limited liability.
- Private limited companies and public limited companies are owned by other individuals, companies, or organizations. The owner and the business are legally separate entities and have limited liability, so the owner is not responsible for the business’s legal and financial obligations. If a public limited company lists its shares on a stock exchange for trading by the public, a private limited company does not.
Orientation
Public sector organizations are not-for-profit. They provide goods and services to benefit the public. The exceptions are state-owned enterprises, which operate commercially like private companies.
Business in the private sector aims to make a profit by providing goods and services. Some seek to maximize shareholder profits and wealth. Others reinvest profits – not to maximize shareholder wealth – for social causes such as social enterprises. The latter aims to provide social impact rather than simply focusing on their shareholders.
Goods and services provided
The public sector delivers goods and services to serve the public. This sector benefits all, not only the population but also businesses in the private sector. Examples of services provided are education, welfare, the legal system, and health.
The government also provides public goods which are not profitable if operated by private companies. The government finances it through taxes and aims to provide equal benefits to everyone. Whether taxpayers or not, they can consume public goods.
Meanwhile, the private sector produces goods and services to earn money and profit. For example, businesses provide various personal items such as food, drinks, clothing, and vehicles. Different from public goods, we have to spend money to consume these goods.
Sources of financing
In operating, organizations in the public sector receive financial support and funding from the government, most of which comes from taxes. State-owned enterprises are an exception, where they can earn income by charging prices for the goods and services they produce.
Meanwhile, businesses in the private sector rely on income from selling goods and services. They use it to pay for expenses such as inputs, salaries, interest, and taxes. If they need more funds for expansion, they can issue shares or take out debt by borrowing from a bank or issuing bonds.
Operation area
The areas in which the public and private sectors operate will vary between countries, depending on which one is closer to a free-market economy and a command economy.
The public sector generally focuses on public goods and vital services such as public education, health, security, and infrastructure. Several strategic industries, such as electricity, transportation, and telecommunications, are also under the public sector, usually through state-owned enterprises.
Meanwhile, private sector businesses operate in areas other than the above. Their work areas are very diverse, ranging from primary sectors such as mining to service sectors such as finance, tourism, and trade.
Job stability and security
Workers in the public sector are civil servants, except perhaps for employees in state-owned enterprises. They receive salaries and benefits under a different system than private employees. They enjoy more job stability because their organization does not have to face competition.
- In contrast, workers in the private sector face a less certain job future than workers in the public sector. Employers are more flexible in hiring and firing workers to support the company’s profitability and competitiveness. They can set their own employment rules as long as they comply with labor laws.
The next difference is about the benefits package. Civil servants often receive comprehensive benefits packages such as health insurance and retirement benefits. Thus, when switching between different public sector jobs, they retain the same benefits.
- On the other hand, such benefits will vary between businesses. Large-scale companies usually provide facilities and benefits such as insurance and pensions, but not for small-scale companies.
Then, promotion in the public sector is usually based on seniority and government regulations or rules. In contrast, in the private sector, performance and achievement are parameters for promoting workers.
Lastly, the private sector offers more job variety due to the wide area of operation. Therefore, it allows individuals to find jobs according to their different interests.
- In contrast, organizations in the public sector focus on providing specific public services. Thus, they offer a more limited choice.
Incentives to be more efficient and productive
Private sector organizations face more competition than organizations in the public sector. As a result, they must build competitiveness and outperform each other to satisfy consumers with their products. And, competition requires them to be efficient and productive to make more profit.
In contrast, competition is almost non-existent in the public sector. For that reason, organizations in the public sector have no incentive to generate more profits, making them likely to be less efficient and less productive. Nonetheless, they have a vital role in the economy by providing public services and goods, regulating the economy, and making public and economic policies.
Summary of the differences between the private sector and the public sector
Public sector
- Owned and controlled by the government, either central or local.
- Comprising organizations at all levels of government plus state-owned enterprises.
- Non-profit oriented and aims to provide services to the public.
- Providing public goods to provide equal benefits for all parties.
- Relying on taxes to finance operations, except for state-owned enterprises, which can generate their own income.
- Operating in public service areas and strategic industries.
- Offering better job stability and security than jobs in the private sector and promotions are based on seniority and government regulations.
- Low incentives to be more efficient and productive because it does not face competition.
Private sector
- Owned by another private individual or organization
- Covering a wide range of business organizations from small companies to giant corporations.
- Profit oriented to maximize shareholder wealth or create social impact.
- Providing private goods for households, businesses, and other organizations.
- Collecting money from selling goods and services.
- Operating in various sectors ranging from primary, secondary, tertiary, and quaternary sectors.
- Offering low job stability and security, depending on financial and business conditions, and promotions are based more on performance and merit.
- Facing more competitive pressures, requiring businesses to be more efficient and productive to generate profits and win the competition.
