Question

How does the problem of limited and bundled choice in the public sector relate to economic efficiency? Why are public bureaucracies possibly less efficient than business firms?

Short answer

Economic inefficiency in the public sector arises due to the poor selection of goods/programs that are offered in a bundled choice that involves efficient and inefficient goods/programs together at the same time.

Public bureaucracies are less efficient because they are run by welfare motive and do not process the concept of internal efficiency.

Step-by-step solution

Inefficiency in the public sector

Different goods, services, programs, or policies are clubbed together in different sectors in the public sector. This leaves lesser options for selection. The bundled stocks of programs/policies may have positive and negative benefits altogether. This leads to economic inefficiency only if there is a poor selection (the total cost of the selection exceeds its total benefits).

For instance, candidates in the assembly elections present an allocation of resources as a party's agenda to gather votes. The allocation includes different programs and policies in certain combinations, which could be beneficial for some and bad for others. The public must agree on one out of the limited choices to choose their next representative.

Economic inefficiency arises when the selected bundle (or representative) creates losses in terms of certain policies. This cannot be ignored as the limited bundles offer both good and bad options together in the same bundle.

Thus, the legislation and the public have to accept that stock which has a greater net positive effect. However, it will include the negative impacts as well, creating economic inefficiency.

Public bureaucracies less efficient than private firms

Public bureaucracies are relatively less efficient than business firms because of the following reasons:

• Unlike private firms, public bureaucracies do not run for profit motives (benefit >cost). They carry on the functioning even if they fail to manage their resources properly. They have the burden of uplifting the sick units of the economy, and their motive is the welfare of society. So, to improve society, they pay the economic efficiency as the opportunity cost.
• Business firms provide incentives to their employees at each hierarchal stage to work efficiently. The incentives may be in the form of shared profit, bonuses, salary hikes, or promotions. Public organizations do not offer such incentives to their employees to encourage efficient working in the organizations.