Public provision and private incentives

Abstract

This paper surveys classical and modern arguments for public production and provision of goods. It reviews the conventional case for public production under conditions of increasing returns and discusses the modifications that have to be made if public production involves a cost inefficiency. It then discusses the causes behind a possible cost inefficiency, such as the difficulty of designing good incentive schemes in agencies with multiple and complex objectives. An alternative to designing better incentives in the public sector is that of contracting out to private firms, and the conditions favourable to this alternative are also discussed.