Policy Study

Public Authorities and Private Firms as Providers of Public Goods

Executive Summary

Public authorities, which are created by statute but share many of the features of both firms and governments, are responsible for planning and financing much of America’s major infrastructure. The structure of these entities insulates them from both the political discipline of traditional governments and the market discipline of private firms. Public authorities enjoy exemptions from many of the statutory restrictions that impose social constraints on firms and governments. They operate free from monitoring that exists either through the electoral checks of politics or the profit-maximizing interests of shareholders. Those to whom public authorities are responsive, such as bondholders, may have interests that vary significantly from the interests of the constituents whom public authorities are created to serve. The result is that public authorities will generally be less efficient than private firms that perform similar tasks.

Private firms providing public works facilities (such as airports, toll roads, water supply, and wastedisposal facilities) tend to be subject to much stronger economic incentives for efficiency than those that affect public authorities. Company managers often have a direct stake in the firm’s profitability, and they can be replaced if stockholders become dissatisfied with their performance. Greater information disclosure in the private sector reinforces these incentive effects.

A number of recent examples illustrate public-authority activities that appear inconsistent with social utility, such as spending money on poorly justified expansions and employing advisors not selected on merit. These activities can be traced to these underlying institutional differences.

Two policy implications follow from this analysis. First, public authorities should be made more accountable, perhaps by removing the immunities they currently enjoy. Second, and more fundamentally, the decision to have public authorities provide major infrastructure should be reconsidered, since private firms can often perform these same public functions, while not suffering from the institutional disadvantages of public authorities.