Cost and Optimization in Government

By Aman Khan | Go to book overview

Preface

This book deals with cost and optimization, two of the most important elements essential for the successful operation of an organization. While cost has always been the focal point of business organizations, it has not received the same level of attention in government until recently. There is a simple reason for this: the private sector is driven by the profit-maximizing incentive and cost is an integral part of it. Without knowing how to manage cost, it will be impossible for any firm or organization to survive, let alone make profit. In fact, there is an inverse relationship between cost and profit: for a firm to maximize profit, it must keep its costs to a minimum. This plain and unassumingly simple principle that lies at the heart of all business operations explains why firms and businesses must remain efficient at all times.

In recent years, there has been a shift in focus from profit maximization, especially in the short run, to revenue maximization in the long run. This apparent shift in business practice has been necessary to ensure that firms build up a clientele that remains loyal to it for a long period of time. Since consumer satisfaction is essential for the long-term viability of a firm, most firms are willing to sacrifice their short-term profit maximization objective for long-run revenue maximization goal.

In contrast, a government does not operate to maximize profit either in the short run or in the long run. Therefore, it does not have the same incentive to undertake measures that will increase its efficiency in the same way the private sector does. Additionally, a government provides a wide array of services the net gain of which to society cannot be measured in precise monetary terms. Yet these services are essential to maintain social order, improve health conditions, revitalize the economy, and raise the level of living for its citizens. In other words, they are necessary to improve the welfare of a society, assuming one is able to measure "welfare" in some meaningful ways.

In reality, it is almost impossible to measure welfare that would be consistent and sufficiently reflective of the social, economic, and political differences that exist in a society. This makes it even more difficult for the decision makers to determine how efficiently a society's resources should to be allocated to achieve a desired level of welfare. From a practical point of view, however, the question of efficiency in resource

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