In private business, this is a sensible method for minimizing total cost. But government agencies do not operate in the private sector with the same competitive pressures as private business. They often maintain excess productive capacity or overhead and allocate resources inefficiently. For this reason, public-sector estimates of the marginal cost of expansion often are unrealistically low. To better assess the relative efficiencies of public and private service, the total cost or fully allocated cost of both should be compared.
Total cost is the sum of the direct and overhead cost of providing a particular service.
B. Beware of These Common Mistakes Cross-subsidizing. Costs of the target department often are borne by other departments in the same agency and not reported as a department expense. When determining costs, be on the lookout for in-house units attempting to subsidize the part of their operations that must compete with private firms from protected parts of the unit. In several cities, for example, solid waste pickup has been broken up into quadrants, some subject to competition and some reserved for in-house operation. On several occasions, private firms have argued that the low bids offered by city units are the result of cross-subsidization.