08 Lecture 08 - Public Sector Decision Making So far, we...

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Public Sector Decision Making So far, we have been learning the economic evaluation methods for use by for-profit, private sector firms. There are many large engineering projects undertaken by government agencies and non- profit organizations where the profit motive is absent. The economic evaluation concepts still apply, but with some modification. This lesson will explore the differences in economic evaluation for public sector (not for profit) projects. Constituencies In for-profit organizations, the decisions are made to maximize the long-term wealth of the owners of the organization, this includes the shareholders, either public or private. As you learned in Lesson 1, there are many other constituencies to satisfy in the development of a project, but wealth maximization for the owners guides decision making. CONSTITUENCIES AFFECTED BY A DECISION Owners (shareholders, partners) Management Employees Customers Suppliers The public Future generations Mankind Governments (surrogate for all non-owners) Public sector projects differ in that they are not owned by private investors or owners, but are owned by the government for purposes of producing benefits to society at large. Two key issues arise is this form of economic evaluation: 1. How to value the benefits and costs for public projects
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How to assess the cost of capital to such projects. In a for-profit business, revenues exceed costs and a profit is made. This profit pays for the capital employed and provides a return to the owners. In public sector projects, the costs may be larger than the identifiable benefits. The benefits may be unevenly distributed among groups and there may not be any return to capital except through the taxation power of government. It is the differences in the distribution of costs and the receipt of benefits that complicates the economic evaluation of public sector projects. If these areas are very vague and, in the extreme, not able to be counted, then the political process takes over and economic efficiency is no longer a criteria. Certain government activities leading to projects that are revenue generating through service fees (instead of general tax revenues) can be classed as separate authorities or entities that have their own "set of books" and financing options without recourse to the taxation authority of the local government proper. These types of activities look and behave more nearly like a business and can be economically evaluated with the techniques we have studied. Constituencies: Limit Regulations and Incentives In market economies with a private sector, the government imposes certain controls on investments, actions, and behaviors through a system of: Limit Regulations Incentives Tax Policy Limit regulations can be familiar items like speed limits and traffic laws to more arcane items in trade regulations and environmental controls. These laws and regulations serve to protect the public and cause private enterprise to more nearly approach behaviors that benefit the most people. There is a downside to limit regulations in that they do not always reflect the
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This note was uploaded on 05/12/2010 for the course BUSINESS BS515 taught by Professor Johnson during the Fall '09 term at Drexel.

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08 Lecture 08 - Public Sector Decision Making So far, we...

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