The Theory of Public Enterprise, Social Welfare and Planning : A Note

After reviewing the theory of social cost-benefit analysis, the paper uses it to illustrate necessary and sufficient conditions for public provision. (A)Under symmetric information and benevolent government, public provision is socially beneficial when there is a well defined public production plan for some goods, when policy and projects, i. e. changes in the production plan, are selected in such a way as to pass a social cost-benefit test at shadow prices, and production cannot be shut down for some goods. (B) Under not (fully) benevolent government, and asymmetric information, while shadow pricing rules do not change if the production plan is further distorted from the optimal one, sub-optimal policy adoption leads to inconsistency in project selection. The allocation of property rights will also be distorted, as privatization or nationalization are signals fixed by the government. Public provision and public procurement will be not equivalent, in general, while public provision can be seen as a form of public procurement. (C) If the social planner is not fully benevolent but cannot profit from policy design, still shadow prices are sufficient statistics for changes of the public plan. State-owned enterprises will be welfare superior to privately-owned enterprises if the rents of the planner are less than the rents of the POEs under procurement, and shadow prices must be used to compare the outcomes. The implication of the paper is that the rationale of public enterprises is destroyed by lack of planning and errors in corruption in policy adoption, but not by errors or corruption in production plans. This points to the overall quality of institutions as a pre-condition for socially desirable public enterprises