“In general, the environment of market competition is superior to that of the political process in providing both the knowledge necessary to respond to people’s needs and the profit incentive to act on that knowledge in ways that create value. Within the political process, agencies face different incentives, as they do not operate by profit and loss. Instead, government agencies are more often concerned with pleasing other political actors and finding ways to expand their budgets and power. This often makes them less sensitive to the direct needs of the people who rely on them to get specific tasks accomplished...
“In addition, the absence of a competitive market for their product means that, in general, government agencies face knowledge problems in determining what their output should be and how best to produce it. However, government agencies with a more decentralized structure that puts them in more direct contact with the people they serve may be able to overcome these knowledge problems. Larger, more centralized government agencies will lack the incentives of firms in competitive markets as well as the knowledge provided by true market prices, but more decentralized ones may do better along the latter dimension.
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