Public Sector: Definition, Role, Pros, and Cons

Updated on July 21, 2020 · By Ahmad Nasrudin Tag: Economic Sector, Public Sector

What’s it: The public sector is the economic sector controlled by the state and includes the central government, local governments, and organizations under them. This sector has an essential role in the economy because it has the authority to regulate the nation’s life, security and order and the economy, and the allocation of resources. In addition, this sector also provides public goods and services, which are either too significant or uneconomical for the private sector.

Sometimes, we may refer to and use the terms public sector and government sector interchangeably. However, by definition, the two are slightly different.

The public sector includes the government sector plus organizations under government ownership and control. The most common example is state-owned enterprises.

Meanwhile, the government sector only includes various organizations at all levels of government, such as central, federal, provincial, district, and city governments. They include departments or ministries under the central government. Their operations are financed through taxes.

On the other hand, some public sectors can operate commercially. For example, state-owned enterprises provide goods and services to generate income. They can also raise funding from the capital market.

The public sector is under the government; it may be the central or local government. This sector serves the public, is not profit-oriented, and is funded through taxes – except for state-owned enterprises.

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State-owned enterprises are an exception because they operate commercially like private companies. They generate income by producing goods and services. However, they also face competitive pressures to make a profit.

The private sector is controlled and owned by individuals. We may see some companies own shares in other companies. However, if we trace them to the top, their shareholders are individuals.

Businesses in the private sector are profit-oriented. Therefore, they compete with each other to satisfy the needs and wants of consumers. The three common business organizations in this sector are sole proprietorships, partnerships, and limited companies.

The public sector is vital for an economy for several reasons. First, the organization within it has the authority to issue and enforce regulations and policies, including imposing sanctions. They may be related to the economy, the rule of law, security and order, business, individuals, and relations between countries.

Second, the government maintains public services and basic facilities, including providing vital public goods and services such as:

How the private and public sectors play a role can vary from country to country. Indeed, nowadays, almost all countries adopt a mixed system. However, how much the two sectors play a role depends on their proximity to the command economy and free-market economic systems.

In a country close to a command economy, the public sector has a central role. However, it is not in a country close to a free-market economy, where the private sector plays a more dominant role.

The public sector plays a role in providing public services. Examples include health and education services, defense, law, and public order. They are considered too significant to be left to the private sector.

In addition, some services such as street lighting, defense, and law may not be priced. Then, their consumption by one person does not reduce their availability to another. And, we cannot exclude others from getting the same benefits. In economics, we call them public goods.

In addition to providing public services, the government and its subordinate organizations operate in strategic sectors. Examples are energy, public transportation, telecommunications, electricity, and water. They are usually operated by state-owned enterprises.

Private businesses are more efficient than the public sector. This is because competitive pressures require businesses in the private sector to do so. If not, they can lose to compete with other businesses.

For such reasons, governments in several countries have taken steps to privatize. For example, it can refer to selling a state-owned company to private investors, usually by listing their shares on a stock exchange. Or, it refers to handing over services, which have so far been provided by the government, to the private sector, for example, through tenders.

Meanwhile, nationalization is the opposite of privatization. It does so by taking over private companies and putting them under government ownership and control.

Organizations in the public sector vary between countries. And, here is an example:

The public sector is a vital role in the economy. For example, the government provides public goods, which the private sector is reluctant to provide because it is not economical. Some other reasons to support the argument for the need for this sector are:

The public sector also has a contra-side and is criticized. The reasons include: