In practice, public and private provision of goods and services appear similar because both involve significant delegation of authority. This article argues that the main difference between them involves transaction costs the government faces when attempting to intervene in delegated production activities. Government intervention is generally less costly under public ownership, but a promise not to intervene is more credible under private production, and it can also have beneficial incentive effects. The Fundamental Privatization Theorem (analogous to the Fundamental Theorem of Welfare Economics) is presented, providing and evaluating conditions under which government production cannot improve upon private production.
