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Article Summary

Sclar, Elliot, 2000. Public vs. Private Production: Is One Better and How Would You Know?. Chapter 3 of You Dont Always Get What You Pay For: The Economics of Privatization. Ithaca, NY: Cornell University Press.

In the third chapter, Sclar questions the simple assertion that the private sector can provide public services more efficiently. Economic arguments for privatization claim that the public sector can save money by moving away from direct production and relying on private providers. Sclar, however, argues that comparative cost studies often fail to fully consider the complex character of the services that they claim to analyze.

For Sclar, the proper way to compare public work with privately contracted work is on the basis of avoidable costs. What are the costs that the public organization can truly avoid through privatization and what are those incurred by extending the contract? Three kinds of costs are crucial when deciding between private contracting and direct public production:

The direct costs of publicly supplied services,

The costs of the outside service contractor,

The internal costs brought upon by a contractual arrangement.

A comparative analysis of the cost of public versus private production must include an account of the transaction costs even if the private sector is more efficient than the public sector at production. What matters is whether the sum of both the contract price and the transaction costs is less than the cost of directly provided public services.

To test the assumption of private provider cost savings, Sclar examines several case studies in order to demonstrate that context matters. Differences in and the complex nature of specific services in specific locations affect costs. Sclar, for example, analyzes all Canadian transit systems, and his findings failed to show any statistically significant (that is, clear and meaningful) difference between the cost of private service and public service. He suggests that one needs to consider productivity and cost issues in the context of specific market conditions and their specific organizationally complex environment.

Arguments for privatization often hinge on the potential to capture labor-cost savings, always the largest part of any public-service operating budget. It is impossible to create meaningful savings without somehow lowering personnel costs. Privatization advocates stress that public employees are greatly overpaid. The author contends however, that privatization arguments need to move away from arguments about differences in public/private wages. Instead they must examine [1] the extent to which private contractors can create higher output per worker and [2] the degree to which private suppliers are forced to pass productivity gains along to the public buyer in the form of lower prices.

Sclar concludes that the question should not be to privatize or not to privatize. Instead the task should be to determine how public and private strengths (e.g. capacity for technological innovation, existing expertise, market structuring power, etc.), might be leveraged in order to provide more value for the tax dollar.