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The theory of public enterprise, social welfare and planning: a note


  • Elisa BORGHI


  • Chiara DEL BO


  • Massimo FLORIO



After reviewing the theory of social cost-benefit analysis, the paper uses it to illustrate necessary and sufficient conditions for public provision. (A)Under symmetric information and benevolent government, public provision is socially beneficial when there is a well defined public production plan for some goods, when policy and projects, i. e. changes in the production plan, are selected in such a way as to pass a social cost-benefit test at shadow prices, and production cannot be shut down for some goods. (B) Under not (fully) benevolent government, and asymmetric information, while shadow pricing rules do not change if the production plan is further distorted from the optimal one, sub-optimal policy adoption leads to inconsistency in project selection. The allocation of property rights will also be distorted, as privatization or nationalization are signals fixed by the government. Public provision and public procurement will be not equivalent, in general, while public provision can be seen as a form of public procurement. (C) If the social planner is not fully benevolent but cannot profit from policy design, still shadow prices are sufficient statistics for changes of the public plan. State-owned enterprises will be welfare superior to privately-owned enterprises if the rents of the planner are less than the rents of the POEs under procurement, and shadow prices must be used to compare the outcomes. The implication of the paper is that the rationale of public enterprises is destroyed by lack of planning and errors in corruption in policy adoption, but not by errors or corruption in production plans. This points to the overall quality of institutions as a pre-condition for socially desirable public enterprises

Suggested Citation

  • Elisa BORGHI & Chiara DEL BO & Massimo FLORIO, 2010. "The theory of public enterprise, social welfare and planning: a note," Departmental Working Papers 2010-20, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
  • Handle: RePEc:mil:wpdepa:2010-20

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    References listed on IDEAS

    1. Massimo Florio, 2007. "Introduction: Multi-government Cost–Benefit Analysis, Shadow Prices and Incentives," Chapters, in: Massimo Florio (ed.),Cost–Benefit Analysis and Incentives in Evaluation, chapter 1, Edward Elgar Publishing.
    2. Willner, Johan, 2006. "Privatisation and liberalisation in an industry with network externalities," Economics Letters, Elsevier, vol. 91(2), pages 197-203, May.
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    Cited by:

    1. Juan-Pierré BRUWER & André VAN DEN BERG, 2017. "The conduciveness of the South African economic environment and Small, Medium and Micro Enterprise sustainability: A literature review," Expert Journal of Business and Management, Sprint Investify, vol. 5(1), pages 1-12.
    2. Mildred E. Warner, 2011. "Club Goods and Local Government," Journal of the American Planning Association, Taylor & Francis Journals, vol. 77(2), pages 155-166, April.

    More about this item


    Cost Benefit Analysis; Publicly provided goods; Social welfare;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H4 - Public Economics - - Publicly Provided Goods
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty


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