James d. Gwartney

Competition and External Anchors Are
Key
Competition is a disciplinary force. In the
marketplace, businesses must compete for
the loyalty of customers. When firms serve
their customers poorly, they generally lose
business to rivals offering a better deal.
Competition provides consumers with
protection against high prices, poor quality
merchandise, poor service, and/or rude
behavior. Almost everyone recognizes this
point with regard to the private sector.
Unfortunately, 
the 
importance 
of
competition in the public sector is often
overlooked.
As discussed in the prior element,
the structure of incentives confronted by
government agencies and enterprises is not
very conducive to efficient operation. There is nothing comparable to profits and losses to help
citizens evaluate the performance of public sector agencies and enterprises. As a result,
managers of government firms can often gloss over economic inefficiency. There is little
incentive to control spending. If an agency fails to spend this year’s budget allocation, its case
for a larger budget next year is weakened. Agencies typically go on a spending spree at the end
of the budget period if appropriations have not yet been spent.
Given the structure of incentives within the public sector, it is vitally important that
ELEMENT 3.10
Competition is just as important in government as in markets.

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government faces competition wherever feasible. If we are going to get the most from the
available resources, private firms must be permitted to compete on a level playing field with
government agencies and enterprises. For example, when governments operate vehicle
maintenance departments, printing shops, food services, garbage collection services, street
maintenance departments, schools, and similar agencies, private firms can easily be given an
equal opportunity to compete with public enterprises, especially if care is exercised to avoid
political favoritism or even bribery. Competition can improve performance, reduce costs, and
stimulate innovative behavior in government, as well as in the private sector.
Competition among decentralized government units—states in the United States or
Germany, regions or oblasts in other countries and local (municipal) governments—can also
help protect citizens from government exploitation. A government cannot be oppressive when
citizens can easily choose the “exit option,” moving to another location that provides a level of
government services and taxes more to their liking. Of course, it is not as easy to walk away
from your government as from your grocer! But the more government functions are
decentralized, the easier it is for citizens to vote with their feet. Moreover, people can benefit
from more competition between sub-national governments without moving themselves. The
fact that some do move from less efficient to more efficient governments and that others could
do the same motivates all governments to become more sensitive to the concerns of their
citizens.