My trash collection experience has substantially improved since I moved to a neighborhood with private garbage collection. Thinking about why private companies often outperform publicly controlled entities can teach us a lot about economics and the role of incentives.
How bad were the public trash collectors across town? The streets were often littered with garbage after the trash collectors came through. On more than one occasion, I found entire garbage bags ripped apart, and their contents left lying on the street. I would even find garbage still remaining in my trashcan on occasion.
With private trash collection, I have witnessed none of these problems from the companies servicing our neighborhood. During the recent ice storms, I received a phone call and a text message letting me know service would be missed and received additional notifications when it was rescheduled. I can even conveniently schedule special item pickups, report a complaint, or get a container repaired from a phone app. On the way to work this morning, I saw a driver patiently waiting for a neighbor to bring out one last remaining bag of garbage.
Why such a stark difference in service quality between the public and the private provider? With the private collector, I am a paying customer with alternative providers to choose. If I am dissatisfied, I can select another vendor. Because of this competition, private companies are extremely responsive in addressing consumer concerns, whether voiced privately, in ratings, or on social media. Market competition thus serves as a powerful regulator, providing companies with a strong incentive to ensure customer satisfaction.
The incentives of public entities, however, are often less powerful. Democratic control of public entities is murky at best. Given the length of time between elections and the number of issues each candidate is running on, local policymakers have less incentive than a CEO of a private company to ensure complaints are addressed. For instance, there is little incentive for public entities to send out customer satisfaction surveys. Even if they did, public employees are notoriously difficult to fire or even reprimand for poor performance.
It is important to note that I’m not impugning the integrity of the workers in the public sector. It is, rather, the incentive structure they face. We see the same incentives at play everywhere, from tenured university professors and the DMV to collectivized agriculture in China.
There are, of course, exceptions. You can find poorly-run private schools and well-run public schools. Sometimes private companies do engage in bad practices. Take private prisons, for instance. With private prisons in our unjust criminal justice system, the incarcerated “customers” don’t actually choose a provider. This offers an example of when the public sector can (very slightly) outperform the private sector. Even in this case, better alignment of incentives and prison vouchers would likely result in the private sector outperforming the public sector.
On the whole, however, the private sector often outcompetes the public sector hands down on both quality and price. The key difference between the private and public sectors driving this result is that market competition is a more powerful regulator than government agents who often lack the information and incentives to serve customers. Consumers often exercise far more control and accountability over a private company than they do over politicians. In fact, they often don’t even have an incentive to make informed choices in the voting booth.
And, moving to another local jurisdiction just to avoid poor garbage services is quite costly and tied to many other services that are hard to disentangle. In this sense, privatization of more government services would better enable residents to separate the services they wish to receive from their place of residence, enabling them more freedom in selecting where to live.
So, what does my trash teach us about economics? What is true of garbage, which should be a relatively straightforward service for a government to provide, is even more true of important and complex services, such as health care and education. Competition to serve customers is the best way to encourage human well-being.
This article was first published by the AIER, and can be found here.
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