Ownership, efficiency and the modern enterprise : a theoretical perspective

Bibliography: pages 120-129.In this dissertation, public and private ownership is compared on the basis of allocative and productive efficiency. At the outset, it is shown how the traditional advantage of owner-managed private firms over their public counterparts in respect of productive efficiency is weakened by the presence of allocative inefficiency in the private sector, due to market failures such as imperfect competition. The case of the natural monopoly is especially important, because there is no scope for improving allocative efficiency by increasing competition. Governments attempt to address this problem by regulating or nationalising these monopolies and then enforcing a policy of managerial cost pricing, albeit at the expense of productive efficiency. However, the gains in' allocative efficiency are lessened by the use of public firms by politicians as political instruments to further their personal interest. As a result, public failures in the form of an over-supply of public goods are created. A compromise between the allocative inefficiency in the owner'-managed private sector and the productive inefficiency in the public sector emerges with the rise of the private managerial firm. Distinctive characteristics of the managerial firm, such as the separation of ownership and control, provide the necessary incentives to reduce monopoly prices and expand output, thereby moving closer to the allocatively efficient position. Although productive efficiency is sacrificed to some extent in the process, the incentives inherent to private ownership ensure that the comparative advantage of the private managerial firm vis-a-vis the public firm is maintained. The net efficiency effect of the private managerial firm is therefore expected to represent a higher level of social welfare than that of the public firm