private and public sectors

1.2 Economic Sectors – Private and Public Sectors

Learning objectives

By the end of this lesson you should be able to:

• Define the private sector and the public sector.
• Classify businesses by the three economic sectors (primary, secondary, tertiary) and then by ownership (private vs public).
• Identify the main characteristics of each sector (ownership, purpose, funding, decision‑making, accountability).
• Explain how business objectives and stakeholder objectives differ between private‑ and public‑sector organisations.
• Describe the common ways of measuring business size (employees, output, capital) and why profit is not a size measure.
• Analyse the advantages and disadvantages of private‑ and public‑sector organisations, linking them to efficiency, equity and risk.
• Explain the role each sector plays in a mixed economy, including public‑private partnerships, regulation, government procurement and the impact of macro‑economic policies (taxes, interest rates).
• Describe the legal controls that apply to public‑sector bodies.
• Understand how sector type influences the major business functions (finance, marketing, operations).
• Use simple profitability and efficiency ratios to compare a private‑sector firm with a public‑sector organisation, and interpret the results correctly.

1. Classification of economic activity

Each of the three sectors can be owned privately or publicly, giving rise to the two broad ownership categories covered in the syllabus.

2. Definitions

Private sector: All businesses and organisations owned and operated by individuals, families, partnerships or shareholders. Their primary aim is to generate a profit for the owners.

Public sector: All organisations owned and operated by the state (central, regional or local). Their main aim is to provide services for the public good rather than to make a profit.

3. Key characteristics

• Ownership
  • Private – individuals, families, partnerships, shareholders (e.g., Tesco, HSBC, Rolls‑Royce).
  • Public – national, regional or local government (e.g., NHS, police, state‑owned utilities).
• Purpose
  • Private – profit maximisation, market‑share growth, return on investment.
  • Public – delivery of essential services, welfare provision, redistribution of wealth, correction of market failures.
• Funding sources
  • Private – equity (share capital), retained earnings, bank loans, bonds, venture capital.
  • Public – general taxation, council tax, National Insurance, government borrowing, international grants.
• Decision‑making
  • Private – owners, board of directors or CEOs; generally fast, market‑driven and profit‑oriented.
  • Public – decisions must pass through ministers, departments, parliamentary committees or local councils; slower but designed for transparency and public accountability.
• Accountability
  • Private – to shareholders (annual reports, dividends) and to customers (quality, price).
  • Public – to elected officials, Parliament, watchdog bodies (e.g., National Audit Office) and ultimately to the taxpayer.

4. Business objectives & stakeholder objectives

• Private‑sector objectives
  • Primary: maximise profit and shareholder wealth.
  • Secondary: increase market share, enhance brand reputation, achieve sustainable growth.
• Public‑sector objectives
  • Primary: deliver services of an acceptable standard to all citizens.
  • Secondary: promote equity, ensure value for money, meet statutory performance targets.
• Key stakeholder groups
  • Private – shareholders, employees, customers, suppliers, creditors.
  • Public – taxpayers, service users (patients, students, voters), government ministers, elected representatives, regulatory bodies.

5. Measuring business size

For both sectors size is measured by quantitative indicators, not by profit:

• Number of employees – reflects labour input.
• Output/value of production – total revenue for private firms; total income (taxes + grants) for public bodies.
• Capital employed – plant, equipment, infrastructure, or public‑sector assets.

Profit is a performance measure, not a size measure, and therefore should not be used to compare the scale of private and public organisations.

6. Comparison of private and public sectors

7. Advantages and disadvantages

Private sector

• Advantages
  • Efficiency – profit motive encourages careful cost control and resource allocation.
  • Innovation – competition drives research & development (e.g., tech start‑ups, automotive R&D).
  • Flexibility – can respond quickly to changes in consumer demand or technology.
  • Access to capital – can raise funds through equity markets or private investors.
• Disadvantages
  • Social & environmental neglect – profit focus may lead to poor labour standards or pollution.
  • Market failures – monopolies, price‑setting, or under‑provision of merit goods.
  • Job insecurity – redundancies are common in downturns.
  • Short‑termism – pressure for quarterly results can discourage long‑term investment.

Public sector

• Advantages
  • Universal provision – essential services are available to all, regardless of ability to pay.
  • Equity & redistribution – taxation and welfare programmes reduce income inequality.
  • Stability of employment – public‑sector jobs are generally more secure.
  • Correcting market failures – can subsidise merit goods, regulate externalities, and provide public goods.
• Disadvantages
  • Inefficiency – lack of competition can lead to wasteful spending.
  • Political interference – decisions may be swayed by short‑term electoral considerations.
  • Budget constraints – reliance on taxation means services can be limited by fiscal policy.
  • Slower decision‑making – multiple layers of bureaucracy can delay projects.

8. Role of each sector in a mixed economy

1. Private‑sector drivers – generate most of the GDP, create employment, and introduce new products and technologies.
2. Public‑sector providers – ensure that essential services (health, education, safety) are available to everyone, even where the private market would not find it profitable.
3. Public‑private partnerships (PPPs) – joint ventures where the state contracts private firms to design, build, finance and sometimes operate infrastructure (e.g., motorways, hospitals).
4. Regulation – government sets standards for health & safety, consumer protection, competition law and environmental limits to curb negative externalities.
5. Government procurement – the public sector purchases goods and services from private companies, providing a steady market for many firms.
6. External macro‑economic influences – changes in tax rates, interest rates or fiscal policy affect private‑sector profitability and public‑sector budgets, linking this topic to the wider “External influences” unit.

9. Economic impact (GDP & employment)

Latest UK Office for National Statistics (2023) figures:

• Private sector contribution: ≈ £1.8 trillion (≈ 75 % of total GDP).
• Public sector contribution: ≈ £600 billion (≈ 25 % of total GDP).
• Private‑sector employment: ≈ 33 million people (≈ 80 % of the workforce).
• Public‑sector employment: ≈ 8 million people (≈ 20 % of the workforce).

These numbers illustrate why the private sector is described as the “engine” of growth, while the public sector acts as the “safety net”.

10. Legal controls over public‑sector organisations

• Statutory framework – Acts of Parliament (or equivalent legislation in other countries) set out powers, duties and performance targets (e.g., health, education, transport Acts).
• Parliamentary / legislative scrutiny – select committees, parliamentary questions and debates examine spending, efficiency and policy outcomes.
• Auditing bodies – national audit offices or supreme audit institutions audit public accounts and report irregularities.
• Freedom of Information legislation – gives citizens the right to request information, enhancing transparency.
• Public procurement regulations – ensure that contracts awarded to private firms are fair, competitive and deliver value for money.
• Note: The examples given (e.g., NHS Act 2006, National Audit Office) are UK‑specific; other jurisdictions have analogous statutes and watchdogs.

11. Influence of sector type on the main business functions

12. Key formulae (assessment focus) and sample calculations

Both sectors can be analysed with simple ratios, but the interpretation differs.

Sample calculation – private firm (Tesco 2022)

• Revenue = £57.9 bn, Net profit = £1.3 bn
• Profit margin = (1.3 ÷ 57.9) × 100 % ≈ 2.2 %

Sample calculation – public body (NHS England 2022‑23)

• Total income (government grant + NHS revenue) = £150 bn, Operating cost = £148 bn
• Operating ratio = (148 ÷ 150) × 100 % ≈ 98.7 % (i.e., 1.3 % of income remains as surplus or for reinvestment).

13. Suggested diagram

Flowchart illustrating the interaction between private sector, public sector and the citizen/consumer in a mixed economy. Include arrows for:

• Goods & services supplied by private firms to consumers.
• Taxes paid by consumers to the public sector.
• Public‑private partnerships delivering infrastructure.
• Regulation and standards imposed by the public sector on private firms.
• Government procurement of private‑sector products.
• Feedback loop: how macro‑economic policies (tax rates, interest rates) affect both sectors.

Summary

The private sector is profit‑driven, owned by individuals or shareholders, and supplies the bulk of a country’s output and employment. The public sector is state‑owned, funded by taxes, and exists to provide essential services, correct market failures and promote equity. Their objectives, stakeholder groups and performance measures differ, but together they form the backbone of a mixed economy. Legal controls, regulation and public‑private partnerships ensure that efficiency and social welfare are balanced, while macro‑economic policies such as taxation and interest rates influence the performance of both sectors.