New York City mayor Zohran Mamdani is socialist true believer, one who still advocates for government ownership of the means of production. What are the economic consequences of government ownership?

We must compare decision-making structures, since economics analyzes decisions. Ownership assigns decision rights; owners make decisions about the use of houses, land, or businesses. And owners get paid for what they own.

Profit is a residual. Businesses incur costs to produce with no guarantee of later sales. The owner keeps any revenue exceeding costs. Aligning decision authority with ownership of the profit creates a powerful incentive to produce efficiently.

Economists assume that profit considerations consequently guide all business decisions – including what, where, when, and how to produce. Owners want to sell at the highest price possible, but customers may not buy and competitors can undercut the price.  A firm which loses money eventually goes bankrupt.

How then does substituting government for private owners change how businesses operate?

Government managers can charge a price just high enough to cover costs but not high enough to make profit. And government managers can lower prices before competition drives prices into line with costs. This benefits consumers.

Some U.S cities supply electricity to their residents. Municipal electricity is price competitive with investor-owned utilities and co-ops. Government ownership is not always a disaster.

Government could though charge high prices and make a “profit.” The revenues could boost government salaries or fund additional government services.

Government enterprises need not charge users at all and cover costs using tax dollars. Zohran Mamdani has promised New Yorkers free buses. Economics strongly recommends continuing to charge customers at least enough to cover the incremental or marginal cost of service.

If government inadequately funds the enterprise, quantity and quality will decline. New York’s free buses might run late or not at all. Underfunding can be a winning electoral strategy since voters have difficulty evaluating funding adequacy. Traffic congestion demonstrates the systematic underfunding of public infrastructure in the U.S.

Government ownership has deficiencies relative to private ownership, beginning with the lack of a residual claimant. Businesses make numerous small adjustments to keep production going.  Something breaks and production halts; the person with decision rights and ownership of the profit seeks a quick remedy.

Diffuse responsibility and lack of personal financial consequences allow problems in government bureaucracies to last days, not hours. Occasionally government can motivate high performance through appeal to patriotism or public spiritedness. But profit systematically works better.

Additionally, political considerations infect business operations.  Elected officials ultimately control government enterprises and cannot disown hiring, purchasing, and contracting decisions. The political factors may be favoritism (hiring buddies) or ideology (advancing diversity and equity through daily operations).

The lack of residual claims particularly slows improvement. People always resist change, even better and more productive ways of doing things. Once government discovers a routine that works, little incentive for further improvement exists. Economic studies documented significantly higher productivity growth for private versus government airlines and railroads in the 1960s and 1970s.

Government enterprises can tap the public treasury and thus do not face the same bankruptcy constraint as private firms. Government enterprises can persist while losing money and poorly serving consumers, like the Postal Service. Uncle Sam occasionally bails out failing businesses, but government enterprises have better access to tax dollars.

Some contemporary socialists get criticized as not real socialists for rejecting government ownership. I content that they “follow the science.”

A century ago, “scientific socialism” was expected to outperform capitalism as rational planning replaced the chaos and waste of the market. Most unexpectedly, economists learned that markets coordinate economic activity much more efficiently than government planners. And government ownership struggles to match the discipline profit seeking imposes on production.

Economically sophisticated socialists learned from this. They advocate for taxes and transfers to achieve socialist goals while letting capitalists produce high standards of living. New York City did not elect an economically sophisticated socialist.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.