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The term private sector refers to the segment of the economy that is not directly controlled or operated by government-run agencies and organizations. Those government-run agencies and organizations make up the public sector. Other terms that are used to refer to the private sector include the citizen sector or the free market. The private sector is made up of companies that operate to make a profit. A third segment of the economy, made up of charities and nonprofit organizations, is known as the voluntary sector.
In very basic terms, the private sector includes anything that is not part of the public sector. Where the public sector provides services for everyone, the private sector provides goods and services generally only for the people who pay for them. For example, people who purchase an item in a store, subscribe to a magazine, or lease a car are the only ones eligible to receive those specific goods and services.
It is often easiest to understand the private sector by comparing and contrasting it with the public sector. The public sector exists to help create order and to provide services to everyone living in a village, town, city, county, state, or country. Think for a moment about all of the money you pay to different government agencies. When you buy a car and register it with your state, you pay a registration fee. That fee is collected by a government agency, usually called something like the Department of Transportation or the Division of Motor Vehicles.
When your income taxes are automatically withheld from your paycheck, those taxes are collected by the Department of Revenue in both your state and at the federal government level. When you get married, you have to apply for a marriage license. The agency that collects the fee and issues the license is run by your county government. Even when you own a house and want to put up a fence around your property, probably you will have to visit your local city or town hall to pay for a permit to build the fence. Your local police department is part of the public sector, as are your local public schools.
All of these organizations are examples of the public sector because they are operated by some segment of government, using public money that comes from taxes and fees paid by all of the citizens and meant for the common good of all of the citizens. The public sector is not meant to earn a profit, that is, to make more money than it spends.
Let's use Tyler as an example of someone who lives most of his life interacting with the private sector. Tyler is 26 years old. He and his wife are expecting their first baby. Tyler works for a company that builds electronic components for video game systems. It's a private company that earns an annual profit of about 6%. This profitability means that Tyler and his co-workers can benefit from bigger raises and more generous benefits because the company is doing well financially.
Two or three times a week, Tyler goes out for lunch with some of his colleagues. They have several favorite restaurants, all of which are private businesses that operate on a for-profit basis so that they make enough money to constantly upgrade their offerings and pay their staffs. Once a week, Tyler shops for groceries on his way home from work. The local grocery store is also a private business that strives to earn a profit every year so that it can continue to advertise, improve its inventory, and provide competitive wages for its employees. Tyler drives a car that he leased at a local dealership—another private sector business.
By contrast, Lisa is someone who spends most of her days interacting with the public sector. She works at her county's courthouse, in the Register of Deeds office. Her job consists of serving people who call, email, or stop in to get certified copies of birth certificates and death certificates. Her salary is paid by the county government, from money that is collected from taxpayers and from people paying fees for specific services that her office and other county agencies perform.
Sometimes it can be tempting to think of the private sector as unfair because it provides services only for those people who directly pay for them. The public sector can also be misunderstood as always fair or good because it provides services for everyone. The truth is that both the private and public sectors are subject to the same possible pitfalls.
People who run companies in the private sector can be greedy and pay their workers poorly. People who are in charge of the government agencies can mismanage money so that public funds are wasted on unnecessary things. But, when a company in the private sector operates irresponsibly, the people who patronize that company can, in most cases, take their business elsewhere. This is not so easy in the public sector, where people have no choice but to pay taxes to use government services, regardless of how well things are run. For an economy and a society to run smoothly, and with maximum freedom for its citizens, a healthy balance between the public and private sectors is ideal.
The private sector is made up of for-profit companies that are not part of the public sector. The public sector consists of government-run agencies and organizations that are funded with taxpayer money and fees paid for specific services. The private sector generally provides goods and services only for the people who pay for them directly, either by making a purchase, subscribing to a service, or signing a lease. Private sector companies exist to make a profit so that they can pay their employees and continually improve their businesses. When a business in the private sector operates poorly or unfairly, the people who patronize that company can, in most cases, take their business elsewhere to show their displeasure to the people who run the company. A healthy balance between the private sector and public sector helps protect the freedoms of people in a society, so that they can find jobs to support their families and receive the services and protection that everyone expects from the public sector.
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| Elements | Examples |
|---|---|
| *Made up of for-profit companies *Does not include companies in the public sector *In general, provides goods and services for people who pay for them directly |
Stores, service companies (cable TV, internet, telephone), supermarkets, etc. |
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