CHAPTER 13
South Africa in brief: public and private sectors
South African land area covers 1 209
090 𝑘𝑚2 with the Northern Cape
covering 30% of the total area but
only 1.8% of the population living
there. Whereas, Gauteng covers 1.4%
of the total area but has 21.4% of the
population living there, putting strain
on the province’s resources due to
overpopulation.
PRIVATE SECTOR
(a) Households
(b) Businesses
PUBLIC SECTOR
(a) Government
HOUSEHOLDS
A household is a housing unit occupied by one or more persons. They tend to be major
spenders in the economy and are the ultimate suppliers of all economic resources.
(1) household as income receivers
Sources of income include: work (wages, salaries, self-employment, business income),
grants and transfer earnings from the government, capital related income (interest from
bonds, dividends from shares/stocks) and private pensions (saved money for retirement).
(2) households as spenders
Households tend to dispose of their income in the following ways: government taxes,
transport, food, water, housing, electricity, services, etc.
BUSINESSES
The business population constitutes as the second major component of the private sector.
plant
firm
industry
physical establishment e.g. BMW factory
business organisation that owns the plants e.g. BMW
group of firms e.g. the motor vehicle industry
Sole proprietors
Partnerships
Close Corporations (CC)
Companies (public or private)
FORMS OF BUSINESSES
owned and operated by a single person e.g. Spaza
shop
owned by two or more individuals who share
management and profits according to their partnership
agreement
shares are held by a select few (no longer exists)
legal entity formed by a group of individuals
•private – shares are not traded publicly
•public – shares are traded on the stock exchange
ADVANTAGES OF COMPANIES:
•Unique Corporate instruments
•Limited liability to owners
•Hiring of specialists or professional management
•Lifetime not constrained to that of the owners (if one of the owners dies, the business can
still continue to exist)
SOLE TRADER/
PROPRIETOR
PARTNERSHIP
CLOSE
CORPORATIONS
PRIVATE
COMPANY Pty
(Ltd) or PUBLIC
COMPANY Ltd
ADVANTAGES
-can make quick decisions:
don’t first have to consult with
other owners which could be
time consuming which means
they can take advantage of
opportunities
-the owner gets all the profit so
there is more motivated to be
successful and hard working
-easy to start
DISADVANTAGES
-the owner must make all the
decisions by himself and must rely
on their own knowledge and
experience
-management problems if the
owner is sick or goes on holiday
which may increase the chances of
failure
-unlimited liability
-no continuity of existence (if the
owner dies then the business closes)
-more owners can contribute to -all partners have to agree before a
capital which can grow the
decision can be made which slows
business more
down decision making which could
-more than one person
result in a loss of opportunities for
can contribute to decision
success
making and management
-unlimited liability so partners could
which means that division of
be over-cautious, and opportunities
labour is better and improve
could be lost
chances of success
-no continuity of existence
new CCs can no longer be registered under the Companies Act
-more shareholders give you
access to more capital
-limited liability so shareholders
will not be held liable for debts
incurred by the business only
capital invested in the
company can be lost
-continuity of existence
-complicated and costly to register
the business
GOVERNMENT
ECONOMIC FUNCTIONS OF THE GOVERNMENT
Providing the
The government provides the legal framework and the services needed
legal structure for a market economy to operate effectively. Government intervention
is presumed to improve the allocation of resources. There can be either
too little regulation (MB exceeds MC) or too much regulation (MB is less
than MC).
Maintaining
Competition is the basic regulatory mechanism in the market system.
competition
With competition, buyers are the boss, the market is their agent and
businesses are their servants.
Monopoly – a single seller controls an industry.
By controlling supply, a monopolist can charge a higher-thancompetitive price. Producer sovereignty then replaces consumer
sovereignty. In South Africa, the government attempts to control the
creation of monopoly powers through the efforts of the Competition
Commission. In come cases, the government allows these monopolies
to exist, but they regulate their prices. Examples of regulated
monopolies are Eskom, Telkom and railway services Transnet.
Redistributing
income
Reallocating
resources
Institutions created to achieve the Government’s objectives with
regards to competition:
• Competition Commission
• Competition Tribunal
• Competition Appeal Court
Government policies and programmes to redistribute a part of the total
income:
• Transfer payments – provide relief and compensation through
monthly payments to provide aid to the unemployed through the
Unemployment Insurance Fund (UIF).
• Market intervention – is the modification of prices controlled and
established by market forces. It provides subsidies to some
manufacturers to assist them to be competitive or to be able to sell their
products at a more affordable price.
• Taxation – uses progressive personal income tax to take larger
proportions of income from the rich and smaller proportions from the
poor to narrow income inequality
*Redistribution involves both benefits and costs. The alleged benefits
are greater ‘fairness’ or ‘economic justice’; the alleged costs are
reduced incentives to work, save, invest and produce, and therefore a
loss of total output and income.
Market Failure occurs when the market system:
(1) produces the ‘wrong’ amounts of certain goods and services
(externalities or spillovers)
(2) fails to allocate any resources whatsoever to the production of
certain goods and services whose output is economically justified
(public goods)
EXTERNALITY
An externality occurs when some of the costs or the benefits of a good are passed on to
or ‘spill over to’ someone, other than the immediate buyer or seller.
(a) Negative externalities – costs inflicted on a third party without compensation e.g.
environmental pollution (correction: legislation and specific taxes)
(b) Positive externalities – benefits that spillover to a third person or the community at
large e.g. education benefits individual consumers; better educated people
generally achieve higher incomes than less well-educated people. But education
also provides benefits to society, in the form of a more productive labour force
(correction: subsidize consumers and suppliers and provide goods via the
government)
PUBLIC AND PRIVATE GOODS AND SERVICES
Private goods – produced through the competitive market system and have two
characteristics: rivalry (one person buys and consumes a product and it is not available
for purchase or consumption by another person) and excludability (buyers who are willing
and able to pay the market price for the product obtain its benefits but those who are
unable or unwilling to pay the price do not) e.g. items sold in stores.
Public goods – everyone can simultaneously obtain the benefit from a public good and
there are two characteristics: non-rivalry and non-excludability e.g. national defence,
street lighting, environmental protection. The inability to exclude individuals from the
benefit of the good creates a free-rider problem. People can receive benefits from a
public good without contributing to its costs (unprofitable).
QUASI-PUBLIC GOODS
A quasi-public goods are goods or services to which excludability could apply but that
has such a large positive externality that government sponsors its production to prevent
an under-allocation of resources e.g. include education, streets and highways, police
and fire protection, libraries and museums, preventive medicine and sewage disposal.
THE REALLOCATION PROCESS
The government charges taxes on households and businesses in the private sector to
reduce the private demand for private goods. The government then spends the tax
process to provide public and quasi-public goods and services.
PROMOTING STABILITY
When the level of total spending matches the economy’s production capacity, human
and property resources are fully employed and prices in general are stable. But
sometimes total spending is either inadequate or excessive and the result is either
unemployment or inflation. The government promotes stability by addressing these two
problems:
(a) Unemployment – when private-sector-spending is too low, the government will
increase government spending or lower taxes to stimulate private spending. The
Reserve Bank will also lower interest rates to stimulate borrowing and spending.
(b) Inflation – is the general increase in the level of prices. Prices of goods and services
rise when spenders try to buy more than the economy’s capacity to produce.
When total spending is excessive, the government may try to reduce total spending
by cutting its own expenditure or by raising taxes to decrease private spending. The
Reserve Bank may also take action to increase interest rates to reduce private
borrowing and spending.
THE GOVERNMENTS EXPENDITURES AND SOURCES OF INCOME