Efficient Public Provision of Commodities: Transaction Costs, Bounded Rationality and Other Considerations

After briefly reviewing recent economic theories about the economic welfare consequences of public provision of private commodities, this article examines the cost efficient supply of publicly provided commodities. In the light of the presence of transaction costs and bounded rationality, and consequences for the competence of public bodies, it considers whether the following are cost effective: (1) increased out-sourcing of government funded work and supplies using market and competitive mechanisms; (2) greater contestability of employment in the public sector; (3) more widespread imposition of user charges for publicly supplied commodities; and (4) the increased use of performance budgeting and accounting in the public sector. These measures are often favoured by proponents of structural adjustment policies as means to increase the economic efficiency of the public sector. However, it is argued here that such measures can potentially reduce the economic efficiency of the public sector rather than increase it.