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The rationale for contracting out municipal services is to be found in public choice theory, which argues if public officials monopolize service delivery, the result will be oversupply and inefficiency.
The differences related to performance assessment in relation to the privatization and outsourcing grow out of the fundamental differences that exist among the kinds of services that a municipality is called upon to provide, in contrast to those that are provided by the private sector. Excludability: Consumers of private goods can be excluded from consuming the product if they are not willing or able to pay for it . When payment can be structured on a pay-per-use or subscription basis, or otherwise, then potentially the private sector can provide such services.
While municipalities do provide some private good type programs and services to their residents, most municipal programs and services are very different in nature from what the private sector can provide. As a practical matter, services of this kind cannot be dispensed with, nor is it practical to attempt to contract around them. Other municipal suppliers lack the element of rejectability. For the most part, there is no practical alternative to the municipal water supply; there is no alternative to city sewers.
So, for instance, private protection services, such as private security guards and even detectives, are supplied as private goods. The service offered is excludable, rejectable, as described above.
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