Private sector

economic-dictionary

The private sector is the set of individuals or organizations whose ownership does not correspond to the State.

Although there are different meanings of the concept, in economics, the private sector is made up of all those economic agents that do not belong to the public sector. According to this, the public sector and the private sector are opposite concepts.

Likewise, it should be noted that when we speak of the private sector we are not necessarily referring to those economic agents whose activities are aimed at making a profit. For example, an NGO is a private organization that is part of the private sector. In fact, its own initials indicate it: Non-Governmental Organization.

In short, and before delving into the components and characteristics of the concept, the private sector is made up of everything that is not owned by the State.

Components of the private sector

As we have said, it is made up of different economic agents, but what are these economic agents? Below we explain the different components of the private sector:

  • Families and households: In general, when we speak of families and households, we are referring to citizens as a whole. They form a double role, since on the one hand they could work for the State, but at the same time they make consumption or investment decisions independent of it. For example, they make decisions about renting or taking out a mortgage, having dinner one night at this or that restaurant.
  • Private for-profit organizations: A private for-profit company is a company whose ownership is exclusively private and seeks to obtain economic benefits from its activity. It is worth mentioning, in this sense, the word ‘exclusively’ since a company could be mixed. That is, to be participated by private entities and, at the same time, by the State.
  • Private non-profit organizations: Private non-profit organizations are those that do not intend to generate profit with their activity and that are not owned by the State. Some of these organizations are foundations, NGOs or associations. For example, a foundation that investigates against a certain disease attracts money to achieve its goals, but its objective is not to profit, but to help people who suffer from said disease.

We have made reference to organizations since the legal form can change a lot from one country to another. In other words, limited liability companies may have different constitution requirements between countries. However, in essence, whatever its legal form, in practically all countries we can differentiate between for-profit organizations and non-profit organizations.

Functions of the private sector

In the same way that the public sector is born and develops with an intention, so does the private sector. Thus, we could indicate that the main functions of the private sector are:

  • Promote the attraction of capital through companies.
  • Generate jobs.
  • Innovate and research new methods or processes.
  • Satisfy the needs that the State does not cover sufficiently
  • Produce goods and services for the population
  • Contribute, through the corresponding legal processes, to collaborate with the State by offering certain goods or services.

It is important to mention that the functions described above may become more or less relevant depending on the type of economic system. For example, for a planned or socialist economy, the private sector must be reduced or eliminated. On the contrary, in a capitalist economy the importance that the system gives to the private is accentuated.

Finally, to find an intermediate point, in mixed economies we can find how the State is in charge of one part and the private sector of the other. For example, there are mixed economies where health and education are mostly public, while in a capitalist system it would be left in the hands of the private sector.

Private sector financing

Private sector financing is usually provided by the same sector. Thus, you can obtain financing through your own resources or external resources. An example of own resources could be setting up a company between three partners in which all three contribute capital. In contrast, a company financed entirely with external resources is a company whose resources are loaned or donated by other entities.

Of course, the private sector could obtain financing from the public sector. For example, via grants or aid. In mixed economies, States can give economic amounts or tax benefits to certain companies in order to improve efficiency in the allocation of resources.

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