Why Is It That Visits To Government Offices Are Routinely Dreadful?
If you stop and think about the parts of the U.S. that are not working well, they are almost all things that the government provides, not the free market. Public education has more than its share of struggles. Public mass transit often falls short. Roads are routinely congested. The healthcare system, while a mix of free markets and government programs, is universally acknowledged as overpriced and inequitably provided. Who looks forward to a visit to a government office?
What are the shared features of government provision of goods and services that lead to problems? That's easy; it is the lack of price signals and the missing connection to a paying customer.
Free markets do a wonderful job of providing people with what they want because it all happens automatically. People go into the market and make purchases. When lots of people discover a great product, the high demand for it results in shortages; the whole supply sells out quickly. This signals the manufacturer and the retailer to produce more and to raise prices. In this way the shortage will be alleviated and consumers will get more of the products that they like.
The extra profits earned by manufacturers and retailers with the larger volume and higher prices will be noticed by competitors. Those competitors will strive to rapidly create competing, substitute products and get them to market. To gain market share, these competing products will be offered for a lower price than the original product that was such a hit. If consumers find these similar products also to their liking, the new competition will gain some of the market and that competition will help bring the price down. Consumers get more of the products they like, and they get a fair price because of marketplace competition.
Similarly, if manufacturers make and retailers stock products that consumers do not like or price them too high, consumers will not buy much. Retailers, seeing the products sit on the shelves, will cut the price and place smaller orders for future deliveries. Some consumers will purchase the products once they are on sale, and as the production levels are reduced there will be less of the product in the marketplace. Supply and demand will move into balance.
By the simple mechanism of price signals, the market adjusts. Retailers and manufacturers get clear signals from consumers, transmitted through visible shortages or surpluses of their products. Consumers receive signals back in the form of price increases or sales. Information is communicated to all the market's players without any effort. Consumers trying to buy what they like and businesses working to earn a profit automatically respond to each other and adjust their behavior in ways that result in everybody getting more of what they want and less of what they don't.
Now, what happens when the government is providing a good or service?
First, there are generally no price signals. If a public school performs poorly, the government cannot lower the price because it is already free. If a public park is fabulous and becomes jammed with families enjoying themselves to the point their enjoyment is diminished by the congestion, government usually will not start charging an admission fee in order to alleviate the overcrowding. Without price signals, consumers are slower to adjust their behavior.
Also, the government does not automatically adjustment its supply of goods and services to conditions of shortage or surplus, because it is not in business to earn a profit. Good schools do not get expanded; bad schools do not get closed. If the lines at a government office are long, there is no profit incentive pushing anybody to put more employees on duty. Similarly, government goods and services that are unwanted may continue to be overprovided for a long period of time because they are funded by tax revenue, not any payments from customers. This means it takes much longer for government to notice something needs fixing.
To adjust the provision of government goods and services, somebody needs to make the decision to change things. If more of the good or service is to be provided, they must find more money and get approval from all the requisite bureaucrats and politicians. To reduce a good or service, funding for shutdown costs may be needed and even more approvals are likely to be required. Nothing is harder to eliminate than a government program.
Even if government did try to pay attention to imbalances in the supply and demand of the goods and services they are providing, it would not be adjusting to the correct signals. Because the government is either not charging any price or levying a fee that does not cover the full cost of providing the good or service, consumers are responding to a false price signal. That means there is no reliable method for determining the correct amount of the good or service for the government to provide.
An enormous problem is that since the users of the government provided good or service are not paying for it directly, there is no feedback from the customers about the service. In the private sector, customer satisfaction is rapidly transmitted through rising or falling revenues. With government provided goods, there is often no direct revenue from the customers so there is no easy mechanism for the users of the service to communicate their pleasure or displeasure with what they are receiving. This lack of feedback through customer revenue is part of the reason that the supply of the government good or service is hard to adjust to customer demand.
A good example of how this works occurred in many cities during the recent recession. People's incomes dropped at the same time that gas prices surged to new highs. These two occurrences led to an enormous increase in the demand for public mass transit in cities nationwide. Unfortunately, the average mass transit system in the U.S. only gets about 25% of its revenue from tickets bought by the riders with the remainder of the funding coming from other government tax revenues.
Because the majority of revenue does not come from customers, as ridership grew revenue did not increase enough to pay for more buses or trains. In fact, the other tax revenues used to fund transit systems fell in many cities more than the ticket revenue rose. The result was that many public mass transit systems actually had to reduce their services exactly as demand for those services was at an all-time high. The government works in such a way that it got things precisely wrong in this case. A private company funded fully by ticket sales would have used the new ticket revenue to expand services. Unfortunately, in the government world instead of meeting the customer demand for more mass transit, customers faced service cuts at the worst possible time.
Another problem with government provided goods and services is that because the revenue comes from government funds, not the customer, the employees working in that government program will tend to treat their government funders as the customers to be kept happy instead of the actual customers. In that sense, teachers and school administrators must keep the politicians who provide them with tax revenue happy instead of the parents whose children they are supposed to be educating. This does not mean that teachers and school administrators would not rather be able to focus just on what is best for the students because they surely would. The problem is that they cannot. Valuable educational time must be wasted on programs mandated by governments because the governments make it a requirement of the funding they provide. The parents provide no direct funding for public education (even though they pay taxes that become the government funding), so the school does not have the same imperative to keep them happy.
For all these reasons and more, government-controlled and influenced parts of our society do not work well. Government waste, inefficiency, and incompetence or often blamed for these shortcomings. While all three of those surely exist, focusing on them misses the larger point. Even if all the waste, inefficiency, and incompetence were eliminated, government still could not function like private markets because the fundamental basis of how government works simply cannot match the speed and simplicity of private markets.
More problems with government provided goods and services are described in my e-book, Ending the Era of the Free Lunch. The big drawbacks are caused by the fundamental differences between government programs and private markets. The funding not coming from the customers leads government employees to be less responsive to those customers because they are freed from relying on the customers' loyalty. The lack of price signals, of a reason to care about surpluses and shortages, means that government is slow to respond to what people want. It is harder for people to transmit their wishes to government and takes much longer for government to decide whether to adjust to what people want. Without the profit motive to provide urgency, everything moves more slowly.
Markets with private companies and customers use the simple methods of price signals, shortages, and surpluses to trade information back and forth. Companies respond to shortages and surpluses by adjusting their production and stocking decisions because they want to avoid losses. Customers respond to higher and lower prices because changing prices makes products more or less attractive to them. With no need for any single entity to coordinate things, markets reach equilibrium and people get what they want. Markets are amazingly efficient at getting consumers the goods and services that they demand.
Governments are missing the profit motive and the price signals. There may be shortages or surpluses of government provided goods and services, but since the government does not care about profit, they do not have to respond to those facts if they do not wish. Worse, since the goods and services are often provided by the government at no cost or a cost to the customer that is below the full cost of providing the good or service, the shortage or surplus is not a reliable signal anyway. What matters is what would happen if the full price was charged. In addition, government employees have to please their funders, not their customers.
There is a role for government in the provision of truly public goods (like national defense) and in correcting for market failures such as pollution or other externalities. When government moves beyond those very limited spheres, the result is guaranteed to be inferior to what the private sector would deliver. That is not the fault of the government employees. It is a result of the fundamental nature of government operations versus how private companies work. Unless the government operation is privatized or run as a business by the government, this problem cannot be fixed.
