The Public and Private Sectors
The UK is a mixed economy. This means that there are some types of economic
activity (the process of production and exchange) that are carried out through the
market and some through the state. These types of economic activity are classed as
the public and the private sector respectively.
The public sector is defined as economic activity that is owned, controlled and
financed by the state on behalf of the population as a whole.
The private sector is defined as economic activity that is owned, controlled and
financed by private individuals with the ultimate aim of making a profit.
Sector Inter-relationships
Our definition of public sector activity as being carried out by the state hides the
diverse range of activities that come within its scope. In many respects, the ability to
be able to assign something purely to the public sector is very much blurred because
of the increasing complexity and inter-relationships between the two sectors. Much
of the education system in the UK, for example, would be classified as being part of
the public sector but within that, there is now a growing role for the private sector.
Some schools are being run by private sector organisations: catering and cleaning
operations are often provided by private sector firms, whilst coaches, admin systems
and IT systems are invariably under private ownership. Additionally, the construction
of new buildings for education is largely done by private sector firms.
It is clear from this that the two sectors have to cooperate to be able to survive and
prosper.
Schools use a complex mix of public sector and private sector cooperation to make
them work. The extent of the involvement of the private sector is a very topical issue.
Copyright: Kelvin Vroegop, from stock.xchng.
We will take a more detailed look at the sort of economic activity that is involved in
both the public and the private sector.
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The activities of the police may be set by the Home Office, but their day-to-day
operations are funded and overseen by local authorities. Copyright: Sasan Saidi,
from stock.xchng.
The Public Sector
The public sector accounts for around 40% of the total gross domestic product
(GDP) of the UK. This means that for every £1 spent in the UK, 40 pence of it
represents spending by the state in some form or another. Virtually every aspect of
our lives is affected by, and in some cases is reliant on, the public sector.
We can further sub-divide the public sector into two major categories: central
government activity and local government activity.
Central government is responsible for spending on overarching activities which affect
everyone in society - defence, law and order, transport, education, health, social
security and so on. Central government sets the main policy objectives of each of
these areas, each of which is represented by a ministry. That ministry receives a
sum of money each year from the Treasury as a budget to carry out its activities.
The following two pie charts show where the government raises funds from and what
it spends our tax money on.
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Source: Public Finances Databank, Crown Copyright.
Many of the day-to-day activities we are familiar with in each of these areas are
carried out by local government. The Department for Education and Skills (DfES) is
responsible for the education system in the UK. Within that remit, there will be a
whole range of different types of education institutions and provision, from
universities to nursery schools. Much of the practical decision making and
administration of these education institutions is carried out by local authorities. They
receive a grant from central government and other money from local taxes, such as
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Council Tax, and business rates to carry out their work. A normal secondary school,
therefore, is likely to receive most of its funding from the local education authority,
which has to spread out the funds amongst all the schools within its area.
The diagram above shows how the budget received by the DfES from the Treasury
finds its way to individual schools.
The range of services offered by central and local government is extensive. Many of
the services provided by the public sector tend to taken for granted but in reality they
are services that make a big difference to our everyday lives. The list below
represents a selection of the services that one County Council in the south west of
England currently provides:
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Abandoned vehicles
Accident prevention and road safety
Adoption services
Adult and community education
Arts development
Bridleway maintenance
Bus lanes, bus passes and bus stops and shelters
Business development
Car parks
Canal maintenance
Care homes
Chemical analysis
Children's homes
Citizens Advice Bureaux
Civil weddings and civil partnerships
Clean air monitoring
Control of hazardous substances
Counterfeit goods
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Day care
Dangerous substances
Debt advice
Drug and alcohol schemes
Food standards
Footpaths
Food hygiene
Gritting of roads
Graffiti removal
Historic buildings
Household waste and recycling
Land pollution
Libraries
Meals on wheels
Museums and galleries
Nurseries
Pavements
Pedestrian crossings
Park and ride schemes
Pot holes in roads
Public footpaths
Road and pathway maintenance
Road cleaning
Road signs and road markings
Schools
Social services
Street lighting
Swimming pools
Trading standards
Trees
Village greens
Youth services
Zebra crossings
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The range of services provided by the public sector touch all our lives in one way or
another.Copyright: Yarik Mission, John Evans and Margan Zajdowicz, all from
stock.xchng.
Merit Goods
Many of these services could be provided by the private sector. For example, there
is no reason why libraries or swimming pools could not be provided by a private
company and a charge made for the use of these services. These types of services
are called merit goods.
Merit goods are goods and services that could be provided by the private sector but
if they were, it's possible that some people would not be able to afford to pay for the
services or might not consume them in sufficient quantities. If libraries were not 'free',
would people still use the services they provide?
Many services provided by the public sector are aimed at enforcing laws and
regulations and protecting the public as a whole - some of these services would be
difficult for a private company to charge for. Copyright: Mark Harris, from
stock.xchng.
Equally, there is no reason why a private firm could not set itself up to go round other
businesses selling food, as well as checking on the standards and the quality of the
hygiene practised in the business. The problem might be how such a business would
charge for this type of service. If you were a sandwich-making business, for
example, would you pay for another business to come in to tell you whether you
were complying with all the rules, regulations and laws governing food preparation
and selling?
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Libraries do levy some charges but the price may be much less than would be the
case if it was run by a private sector organisation. Copyright: Wynand van Niekerk,
from stock.xchng.
The answer is probably not! These types of goods and services are called public
goods. A public good is a good or service where the benefits of consumption cannot
be excluded from those who choose not to pay. As a result they have to be provided
for the benefit of everyone - if you provide it for one you provide it for all. The
underlying principle is based around something called mutual exclusivity in
consumption.
Street lights are a very good example. If there is a street light outside my house, its
benefit is shared by anyone using the road as well as me. If I decided to pay for the
street light for my own benefit I cannot prevent those who have not paid from getting
the same benefit. This contrasts to a private good where the benefits of
consumption can be excluded from those who do not pay. For example, if I am sitting
outside my house in the summer enjoying a glass of wine, then I can exclude those
who have not paid for the wine from the benefit - if I choose to drink it you cannot
also drink that same glass of wine.
The provision of goods and services by the public sector obviously needs to be paid
for in some way. We have mentioned the basic relationship between central and
local government. It is worth being aware of some of the other ways in which the
public sector raises funds. One of the main principles of public sector provision is
that it is free at the point of use. This means that you can go into a library and
make use of the facilities but not have to pay to get in.
This does not mean that there are no charges for public services. If you return a
book late to a library, for example, you have to pay a fine. If you go to a public
swimming pool, you have to pay to get in. Invariably, though, the price charged for
these types of services is less than might be the case if they were provided by a
private sector firm, which is important. Local authorities will have to think carefully
about the pricing policies they adopt - what should and what should not be paid for
and what level to set the price at. Revenue from charging for services such as car
parks and removing wasps' nests from houses are used to help top up the budget.
Financing Local Government
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How local governments are financed and therefore how they are able to fund their
services is a highly topical issue and one that generates a good deal of emotion and
argument.
The government will assess what it thinks each local authority will need to spend
taking into account its size, the population, its economic and social position and so
on. The government will then estimate what the local authority should be spending
and estimates what its tax raising capacity is. It then uses this to decide how much
grant the government will give to the local authority. The local authority will then have
to calculate what it needs to raise in council tax from its residents. If it wants to
spend more than the government have planned for then it will have to consider
raising council tax. Its decisions on this are monitored by central government to
prevent local councils raising council tax beyond rates that would be politically
unpopular. Needless to say the wrangling and debate about the size of the grant and
what the local authority needs to spend its money on and how much council tax
needs to be raised by is a constant source of disagreement.
The table below shows the overall breakdown for Somerset County Council in the
south west of England - the amounts give a good indication of how many local
authorities' budgets work.
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The Overall Budget Picture for Somerset County Council. Source: Somerset County
Council [PDF, 374 KB]
The Private Sector
The private sector accounts for around 60% of all the economic activity that goes on
in the UK. The private sector includes all those private businesses that operate with
the intention of making a profit. It ranges from the massive multi-national public
limited companies like Vodafone, Glaxo Smith Kline and Tesco through to the mobile
sandwich van, local plumber, chimneysweep and pub!
The size of organisations in the private sector varies but the basic principles of their
operation are similar. They are owned by private individuals; in the case of the
mobile sandwich bar, it might be an individual person who has set up the business;
in the case of Vodafone it might be thousands of shareholders some of whom own a
hundred shares, some of whom might own several million and some who are not
even resident in the UK.
The size of the organisation is dependent in part on the type of business
organisation. A sole trader is a business owned, controlled and financed by one
person. A Partnership contains two or more people who own, finance and control
the business. Private limited companies have between 2 and 50 shareholders and
public limited companies (plcs) have a minimum of 2 shareholders but no
maximum. Other forms of business organisation in the private sector include
cooperative societies and charities.
Co-ops are owned by the members who in turn receive a share of the profits made
often in proportion to the amount of spending they have made with the co-op.
Charities exist to either raise money to help a particular cause such as the Meningitis
Research Foundation or the World Wildlife Fund (WWF) or operate as a registered
charity because they are not operating to make a profit - any surplus is put back into
the charity. Many independent schools in the UK are registered charities.
Charities are part of the private sector but any 'profit' they make is called a surplus
and is not distributed amongst its shareholders as is the case with a business. It is
used to either fund a cause or put back into the organisation for the benefit of its
users. Copyright: Ashley Flood, from stock.xchng.
Private sector activity is heavily dependent on how it meets market needs. In many
cases, the activity is driven by a need to maintain efficiency and reduce costs but try
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to maximise revenue from sales. If this can be done successfully, the business will
make a profit. Profit is the reward for enterprise. They have to meet all the rules,
regulations and laws of the country but within these constraints are free to do pretty
much what they like. The prospect of making profit spurs these types of
organisations into seeking to be as efficient as possible and to maximising revenue.
In most cases, private sector businesses will look to charge a price for their product
that is the maximum that a consumer is willing to pay. This is called price targeting.
If I am prepared to pay £15 for a CD then why only charge £12.99? In its pure form,
price targeting would focus on every individual and extract information about the
maximum that s/he is prepare to pay for a good or service and charge that price to
them. In reality that is not possible although it has been a strategy that Amazon used
at one stage.
Amazon is able to track its customers buying preferences and habits using a cookie.
A cookie is a piece of information generated by Web servers and stored on a users
PC. That is how Amazon can recognise who you are and offer you items based on
your personal choice history. If you regularly buy shred metal CDs from Amazon,
they will not send you recommendations that feature CDs from Des O'Connor!
Amazon was able to use this information to send you information and offers but
charge different prices to different people for the same product. Amazon has now
ceased this practice but it represents something that all firms might like to do if they
were able!
The incentive that exists for businesses to make profit is the spur to the dynamism
that characterises the private sector. It is always changing in response to changing
tastes, fashions, needs, technology and ideas. It is this dynamism that makes the
private sector so appealing as a means of allocating scarce resources.
The Balance Between Private and Public Sectors
This leads us into a discussion about the relative merits of the private and public
sector. There is much debate in government about the 'best' way of providing the
range of public services we have mentioned. The dynamic nature of the private
sector means that it is better at providing some of these services - according to
some. The private sector can provide goods and services more efficiently and at a
higher quality and at lower prices compared to its public sector counterparts. This
relies on an assumption that there is an element of competition in the market.
In the 1980s, a large swathe of public sector activity in the UK was transferred to the
private sector, so called 'privatisation'. Gas, electricity, the telephone system,
railways, airports, nuclear power, water, all these and more were put into the private
sector. Many smaller operations in schools and hospitals such as catering and
cleaning were also contracted out to private firms as was refuse disposal in local
authorities. The premise was that consumers of these services would get better
value for money and better quality services from these private firms.
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The railways - more efficient and better value for money in the private or the public
sector?
The extent to which this has been successful is still debated. There have been cases
where the level of competition in the industry has been limited and the benefits might
not be as great as first suggested. The debate over the role of the private sector in
the provision of public services is still raging. The current Labour Government has
reform of public sector services at the heart of its policies. The extent to which some
of these services are provided by the state and which are provided by private firms is
still a major part of the debate and the difference between political parties.
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