Gunel Mukhtarova
Chapter 2
Role of Government
What government should or should not do needs to be of fundamental concern to public managers. All
government activities require organization and staff – the public or civil service. But the operations of the
bureaucracy, its theories and principles, are not well understood and there is a curious ambivalence
towards it by the citizenry. At the same time as there are demands for governments to do more, and to do
so more effectively and efficiently, the public services are often seen as parasitic on the private sector. At
the end of the twentieth century, there seemed to be great uncertainty as to the role of the public sector.
Governments have a variety of roles and their full scope is not easily measured. It is no exaggeration to
say the public sector affects the entire economy and society. Without a legal framework to enforce
contracts, private business activity would not work. Regulations, taxes, permits, infrastructure, standards,
conditions of employment all affect decisions made in private markets. The public sector is a large
purchaser of goods and services from the private sector. The public sector has a crucial role to play in
determining real living standards which depend for most people on government services – the quality of
schools, hospitals, community care, the environment, public transport, law and order, town planning, and
welfare services – at least as much as the quality of consumer goods and services. It is noteworthy that
successive governments did not lead a return to traditional bureaucratic administration.
The need for a public sector:
By convention, the economy is divided between the private and public sectors. The public sector is
defined by one author as ‘engaged in providing services (and in some cases goods) whose scope and
variety are determined not by the direct wishes of the consumers, but by the decision of government
bodies, that is, in a democracy, by the representatives of the citizens’. Governments are command- based
– they can force people to comply – whereas markets are voluntary.
Private and public management
1. public sector decisions may be coercive. Citizens can be forced to comply with decisions, pay taxes,
have their property compulsorily acquired, and are subject to sanctions deriving in the end from the
coercive powers of the state. Not all public activities are coercive, but those that are need to be carried out
more carefully than in the private sector. Private enterprises have more freedom to be arbitrary. They can
charge different customers different prices, they can refuse to deal with them.
2. Secondly, the public sector has different forms of accountability from the private sector. While
company management is theoretically accountable to shareholders, the public employee is accountable to
the political leadership, parliaments, the public, and to various parts of the judicial system. Accountability
is also a problem in the private sector can ignore normal procedures.
3. Thirdly, the public service manager must cope with an outside agenda largely set by the political
leadership. This is different from an organization where the shared motivation at all levels of the
organization is to make money. The presence of political authority ‘is more than simply an influence on
public strategic management; it is a defining characteristic’. Having to follow a political agenda and a
sometimes unresponsive or even hostile administration can lead to conflict between the bureaucracy and
the politicians. This is not to say that working to a political agenda is any less rational than is a
moneymaking one. It is that the political agenda makes management in the public sector different. Having
a large part of the agenda imposed by politicians reduces the scope of action of a manager.
4. Fourthly, the public sector has inherent difficulties in measuring output or efficiency in production. It
lacks ‘bottom-line’ criteria analogous to profit in the private sector. Measurement and evaluation are
, Gunel Mukhtarova
possible in the public sector, but are more difficult and perhaps less meaningful. The lack of suitable
measurement may enable parts of the public service to perform no useful function and to evade scrutiny.
5. Finally, the public sector’s sheer size and diversity make any control or coordination difficult.
Somehow governments and their advisers try to coordinate the activities of the largest and most complex
part of society’s activities. Coordination must be political and is never easy.
Government and Governance
There is an important distinction to be made between ‘government’ and ‘governance’. Government is the
institution itself, where governance is a broader concept describing forms of governing which are not
necessarily in the hands of the formal government.
By governance, we mean the processes and institutions, both formal and informal, which guide and
restrain the collective activities of a group. Government is the subset that acts with authority and creates
formal obligations. Governance need not necessarily be con- ducted exclusively by governments. Private
firms, associations of firms, nongovernmental organizations (NGOs), and associations of NGOs all
engage in it, often in association with governmental bodies, to create governance; sometimes without
governmental authority.
Market failure as the basis for public policy
Although the sale of goods and services is the basis of a capitalist society, there are some circumstances
where markets may not provide all the goods and services that are desired, or may do so in ways, which
adversely affect the society as a whole. The market mechanism alone cannot perform all economic
functions; public policy is needed to guide, correct, and supplement it in certain respects.
1. Public Goods: Private goods are enjoyed by whoever paid for them. Once someone pays the
asking price, the property becomes theirs by the process of exchange and no one else can use it
unless the owner gives permission. Public goods are quite different as they benefit all users
whether or not they have paid the price. They are ‘non-excludable’, that is, if provided to one,
they are available to all. It is not possible for citizens to decide what level of national defence
they individually want and then pay precisely that amount in their taxes. There seems to be no
way except for government to provide such public goods, although the dividing line between
public and private goods is often rather blurred.
2. The literature also points to merit goods. These are services, such as educa- tion and health care,
that are socially desirable, but which markets may not pro- vide optimally. The market may
provide them in a technical sense – they are excludable – but there are benefits to the whole
society by some government involvement. An educated workforce is economically desirable as
an educated worker is able to perform more complex tasks; government provision or assis- tance
may improve overall educational outcomes for the benefit of society as a whole. But how
education is funded is a general problem. If education is regarded as a private good there are
equity problems between individuals as well as efficiency ones if those with innate ability are not
educated. On the other hand if parents wish to spend extra money on education, there is no way of
preventing this.
3. Externalities: Market transactions often have effects on third parties, or on the environment, that
only government action can alleviate. For example, it is possible to buy a car and its fuel through
the market, but the externality or ‘spill-over’ effects on air quality or vehicle accidents are not
captured by the price paid for the items causing the problem. Environmental effects are usually
Chapter 2
Role of Government
What government should or should not do needs to be of fundamental concern to public managers. All
government activities require organization and staff – the public or civil service. But the operations of the
bureaucracy, its theories and principles, are not well understood and there is a curious ambivalence
towards it by the citizenry. At the same time as there are demands for governments to do more, and to do
so more effectively and efficiently, the public services are often seen as parasitic on the private sector. At
the end of the twentieth century, there seemed to be great uncertainty as to the role of the public sector.
Governments have a variety of roles and their full scope is not easily measured. It is no exaggeration to
say the public sector affects the entire economy and society. Without a legal framework to enforce
contracts, private business activity would not work. Regulations, taxes, permits, infrastructure, standards,
conditions of employment all affect decisions made in private markets. The public sector is a large
purchaser of goods and services from the private sector. The public sector has a crucial role to play in
determining real living standards which depend for most people on government services – the quality of
schools, hospitals, community care, the environment, public transport, law and order, town planning, and
welfare services – at least as much as the quality of consumer goods and services. It is noteworthy that
successive governments did not lead a return to traditional bureaucratic administration.
The need for a public sector:
By convention, the economy is divided between the private and public sectors. The public sector is
defined by one author as ‘engaged in providing services (and in some cases goods) whose scope and
variety are determined not by the direct wishes of the consumers, but by the decision of government
bodies, that is, in a democracy, by the representatives of the citizens’. Governments are command- based
– they can force people to comply – whereas markets are voluntary.
Private and public management
1. public sector decisions may be coercive. Citizens can be forced to comply with decisions, pay taxes,
have their property compulsorily acquired, and are subject to sanctions deriving in the end from the
coercive powers of the state. Not all public activities are coercive, but those that are need to be carried out
more carefully than in the private sector. Private enterprises have more freedom to be arbitrary. They can
charge different customers different prices, they can refuse to deal with them.
2. Secondly, the public sector has different forms of accountability from the private sector. While
company management is theoretically accountable to shareholders, the public employee is accountable to
the political leadership, parliaments, the public, and to various parts of the judicial system. Accountability
is also a problem in the private sector can ignore normal procedures.
3. Thirdly, the public service manager must cope with an outside agenda largely set by the political
leadership. This is different from an organization where the shared motivation at all levels of the
organization is to make money. The presence of political authority ‘is more than simply an influence on
public strategic management; it is a defining characteristic’. Having to follow a political agenda and a
sometimes unresponsive or even hostile administration can lead to conflict between the bureaucracy and
the politicians. This is not to say that working to a political agenda is any less rational than is a
moneymaking one. It is that the political agenda makes management in the public sector different. Having
a large part of the agenda imposed by politicians reduces the scope of action of a manager.
4. Fourthly, the public sector has inherent difficulties in measuring output or efficiency in production. It
lacks ‘bottom-line’ criteria analogous to profit in the private sector. Measurement and evaluation are
, Gunel Mukhtarova
possible in the public sector, but are more difficult and perhaps less meaningful. The lack of suitable
measurement may enable parts of the public service to perform no useful function and to evade scrutiny.
5. Finally, the public sector’s sheer size and diversity make any control or coordination difficult.
Somehow governments and their advisers try to coordinate the activities of the largest and most complex
part of society’s activities. Coordination must be political and is never easy.
Government and Governance
There is an important distinction to be made between ‘government’ and ‘governance’. Government is the
institution itself, where governance is a broader concept describing forms of governing which are not
necessarily in the hands of the formal government.
By governance, we mean the processes and institutions, both formal and informal, which guide and
restrain the collective activities of a group. Government is the subset that acts with authority and creates
formal obligations. Governance need not necessarily be con- ducted exclusively by governments. Private
firms, associations of firms, nongovernmental organizations (NGOs), and associations of NGOs all
engage in it, often in association with governmental bodies, to create governance; sometimes without
governmental authority.
Market failure as the basis for public policy
Although the sale of goods and services is the basis of a capitalist society, there are some circumstances
where markets may not provide all the goods and services that are desired, or may do so in ways, which
adversely affect the society as a whole. The market mechanism alone cannot perform all economic
functions; public policy is needed to guide, correct, and supplement it in certain respects.
1. Public Goods: Private goods are enjoyed by whoever paid for them. Once someone pays the
asking price, the property becomes theirs by the process of exchange and no one else can use it
unless the owner gives permission. Public goods are quite different as they benefit all users
whether or not they have paid the price. They are ‘non-excludable’, that is, if provided to one,
they are available to all. It is not possible for citizens to decide what level of national defence
they individually want and then pay precisely that amount in their taxes. There seems to be no
way except for government to provide such public goods, although the dividing line between
public and private goods is often rather blurred.
2. The literature also points to merit goods. These are services, such as educa- tion and health care,
that are socially desirable, but which markets may not pro- vide optimally. The market may
provide them in a technical sense – they are excludable – but there are benefits to the whole
society by some government involvement. An educated workforce is economically desirable as
an educated worker is able to perform more complex tasks; government provision or assis- tance
may improve overall educational outcomes for the benefit of society as a whole. But how
education is funded is a general problem. If education is regarded as a private good there are
equity problems between individuals as well as efficiency ones if those with innate ability are not
educated. On the other hand if parents wish to spend extra money on education, there is no way of
preventing this.
3. Externalities: Market transactions often have effects on third parties, or on the environment, that
only government action can alleviate. For example, it is possible to buy a car and its fuel through
the market, but the externality or ‘spill-over’ effects on air quality or vehicle accidents are not
captured by the price paid for the items causing the problem. Environmental effects are usually
