Efficient Local Government Service Provision: The Role of Privatization and Public Sector Unions

Source: Rhiannon Jerch, Matthew E. Kahn, & Shanjun Li, USC-INET Research Paper No. 16-10, March 8, 2016

Local governments spend roughly $1.6 trillion per year to provide a variety of public services ranging from police and fire protection to public schools and public transit. However, we know little about public sector’s productivity in delivering key services. To understand the productivity both over time and across space, we examine public bus service, which represents a standardized output for benchmarking the cost of local government service provision. There is a significant dispersion across transit agencies in the operating cost per bus mile with the highest being more than three times as high as the lowest among top 20 largest cities by population. We estimate the cost savings from privatization and explore the political economy of why privatization rates are lower in high cost unionized areas. Our analysis finds that the full privatization could result in cost savings of $5.7 billion in 2011 (30% of total operating expenses of bus services), and a welfare gain of at least half a billion dollars.