Decision making in absence of price
The managers of public enterprises that are enhanced by a direct grant by local or central government have no prices to guide them to find out what consumers expect of them or to measure the revenue products of the factors of production employed. With no market, consumers have no simple mechanism to express their preferences for particular goods and services or their satisfaction with what is actually supplied. Without knowledge of consumer preferences and demand functions the government may impose on the agencies simple supply and quality targets. The state education system has to provide ‘‘free’’ school education to all children between the age of 5 and 16. To add quality to quantity performance, schools must teach the national curriculum and targets are set, such as a certain proportion of pupils being able to read or the passing of examinations. Such targets tend to distort the allocation of resources, because building the targets becomes more important than building the true preferences of the ultimate consumers.
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