What’s it: The public sector is the economic sector controlled by the state and includes the central government, local governments, and organizations under them. This sector has an essential role in the economy because it has the authority to regulate the nation’s life, security and order and the economy, and the allocation of resources. In addition, this sector also provides public goods and services, which are either too significant or uneconomical for the private sector.
What is the difference between the government sector and the public sector?
Sometimes, we may refer to and use the terms public sector and government sector interchangeably. However, by definition, the two are slightly different.
The public sector includes the government sector plus organizations under government ownership and control. The most common example is state-owned enterprises.
Meanwhile, the government sector only includes various organizations at all levels of government, such as central, federal, provincial, district, and city governments. They include departments or ministries under the central government. Their operations are financed through taxes.
On the other hand, some public sectors can operate commercially. For example, state-owned enterprises provide goods and services to generate income. They can also raise funding from the capital market.
What is the difference between the private sector and the public sector?
The public sector is under the government; it may be the central or local government. This sector serves the public, is not profit-oriented, and is funded through taxes – except for state-owned enterprises.
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State-owned enterprises are an exception because they operate commercially like private companies. They generate income by producing goods and services. However, they also face competitive pressures to make a profit.
The private sector is controlled and owned by individuals. We may see some companies own shares in other companies. However, if we trace them to the top, their shareholders are individuals.
Businesses in the private sector are profit-oriented. Therefore, they compete with each other to satisfy the needs and wants of consumers. The three common business organizations in this sector are sole proprietorships, partnerships, and limited companies.
Why is the public sector important?
The public sector is vital for an economy for several reasons. First, the organization within it has the authority to issue and enforce regulations and policies, including imposing sanctions. They may be related to the economy, the rule of law, security and order, business, individuals, and relations between countries.
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Second, the government maintains public services and basic facilities, including providing vital public goods and services such as:
- Housing area
How important is the public sector?
How the private and public sectors play a role can vary from country to country. Indeed, nowadays, almost all countries adopt a mixed system. However, how much the two sectors play a role depends on their proximity to the command economy and free-market economic systems.
In a country close to a command economy, the public sector has a central role. However, it is not in a country close to a free-market economy, where the private sector plays a more dominant role.
How does the public sector play a role?
The public sector plays a role in providing public services. Examples include health and education services, defense, law, and public order. They are considered too significant to be left to the private sector.
In addition, some services such as street lighting, defense, and law may not be priced. Then, their consumption by one person does not reduce their availability to another. And, we cannot exclude others from getting the same benefits. In economics, we call them public goods.
In addition to providing public services, the government and its subordinate organizations operate in strategic sectors. Examples are energy, public transportation, telecommunications, electricity, and water. They are usually operated by state-owned enterprises.
Privatization vs nationalization
Private businesses are more efficient than the public sector. This is because competitive pressures require businesses in the private sector to do so. If not, they can lose to compete with other businesses.
For such reasons, governments in several countries have taken steps to privatize. For example, it can refer to selling a state-owned company to private investors, usually by listing their shares on a stock exchange. Or, it refers to handing over services, which have so far been provided by the government, to the private sector, for example, through tenders.
Meanwhile, nationalization is the opposite of privatization. It does so by taking over private companies and putting them under government ownership and control.
What are the organizations in the public sector?
Organizations in the public sector vary between countries. And, here is an example:
- Core government. It includes government bodies such as central, state, federal, provincial, district and city governments. It includes subordinate organizations such as ministries and departments.
- Government agency. It consists of public organizations tasked with delivering public programs, goods, or services but not for profit and operating under government financing, usually under a ministry or department. An example is a national library.
- State-owned company. These organizations are similar to companies in the private sector in that they can generate income by providing goods and services. They are not dependent on taxes. Management has greater autonomy. They typically operate in the strategic industry such as electricity and water.
- Public-private partnership. This organization combines private and public sector participation. The business models are very diverse. They are usually set up to provide essential goods and services such as infrastructure.
What are the pros of the public sector?
The public sector is a vital role in the economy. For example, the government provides public goods, which the private sector is reluctant to provide because it is not economical. Some other reasons to support the argument for the need for this sector are:
- Providing public goods or services. The government provides them without charging a price but finances them through taxes. And all parties benefit equally.
- Provide essential public goods and services. In some countries, the government provides health and education services to ensure their affordability. Then, the government often controls strategic sectors such as electricity, water, and transportation through state-owned enterprises, which are provided at reasonable prices, usually subsidizing them.
- Maintain economic stability. The government administration issues various policies and regulations vital to support economic stability. Examples are monetary and fiscal policy.
- Enforce order and security. The government has the authority to maintain order and security. For example, it is important to maintain the business and investment climate. Without them, we might have to spend money renting such a service.
- Prioritizing the public interest. The government issues regulations such as antitrust laws, employment, and consumer protection to protect the public interest. Without it, businesses may exploit us for the benefit of a few (shareholders).
What are the cons of the public sector?
The public sector also has a contra-side and is criticized. The reasons include:
- Less efficient and low innovation. The public sector faces no competition. Thus, there is no urgency to be more efficient. It also results in low innovation in the sector, which tends to provide poor quality goods and services.
- Government intervention. Free market economists criticize government intervention for preventing market mechanisms from working to reach equilibrium. Then, political interference can also disrupt the business climate.
- Complicated bureaucracy. For example, a business may have to spend extra effort to obtain a license to operate or invest. It increases the cost of doing business.
- Corruption. Corrupt behavior is responsible for various problems such as poor infrastructure, acute poverty, and poor health services.