Competitive Tendering. Competitive tendering occurs when the government invites private firms to bid for the contract to produce a good or service. The firm bidding the lowest cost, subject to quality, wins the contract.
Benefits of Competitive Tendering
- Public sector is bureaucratic and inefficient, the private sector is efficient and incentivized to minimize costs to maximize profits.
- Bidding means competition amongst bidders so low prices and high quality for consumers.
Costs of Competitive Tendering
- The private sector provider may fail to meet the specification of the contract.
- Maybe only a small number of firms bid for the contract, not much competition, not lowest cost or best quality.
- Maybe the government aim to maximize tax revenue rather than consumer welfare. The government may accept the highest bid regardless of the effects on consumer welfare.
- Collusion between bidders.
- Private firms may exploit workers to charge such low prices.