Question

According to Lindsay (1976), why are the average costs of production likely to be lower for a public hospital than for an otherwise identical private hospital? Do you agree with the conclusion? Please explain your thoughts.

Answer 1

Lindsay assumes that politicians tie managerial compensation to the level of net social income that public organization generates. Net social income is equivalent to profits in private sector, is the difference between the social value of output and total cost of production. Higher managerial pay results from high net social income.

Average cost is total cost divided by the quantity. The quantity here is basically quality of the service i.e., number of staff visits, words of encouragement, number of smiles which are comparatively less in private sector. Prices are fixed by politicians and so, AC is lower in public hospitals.