The Theory of Public Enterprise
Public enterprise is a single, monopolistic producer that provides public goods. The good in question is what economists call a "natural monopoly." These parameters, monopolies and public goods, create the rationale for public enterprises. In this case, a single producer or provider can provide a good better than the marketplace. Traditional examples of natural monopolies are bridges, sewers, water providers, governments, police and national defense agencies.
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Features
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The basic theory of public enterprise revolves around natural monopolies. A natural monopoly is defined as having excludability and lack of rivalry in consumption. Excludability refers to the ability of a firm to keep people from using a product. Prices or tolls can keep certain people from buying a product. Rivalry in consumption refers to the idea that if more than one person uses a product, it does not alter that product. Clean air is the perfect example of this: one cannot keep people from breathing, and further, clean air is not harmed by more than one person breathing it. Clean air, therefore, is a public good.
Function
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The public enterprise produces public goods. A bridge is a good example. There is a high initial cost in building, but minimal change in the bridge as each additional car rides over it. There is no real incentive for another firm to come in and build another bridge at the same place; that would make no sense. Competition over the construction of bridges to provide a public good would be harmful, rather than helpful. There can only be one bridge on that same section of road and, hence, is a natural monopoly.
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Considerations
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The concept of public enterprise is very similar, though not identical to, the idea of public goods. All public enterprise produce public goods, but not all public goods are created by public enterprises. It is the case that all natural monopolies are producing public goods and in general are maintained by public enterprise.
Significance
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From an economic standpoint, the real significance of public enterprise is that, in certain limited cases, the government does better at providing certain goods, like police protection or courts, than private enterprise would. This is not to say this concept is not being challenged. Libertarians and pro-free market activists are well-known for holding that privatizing such natural monopolies as roads or police services would improve performance.
Benefits
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Consider taxation. Most do not want to pay taxes. Most would rather just enjoy the public goods that such taxes produce. Therefore, governments must force people to pay taxes. This is called the "free rider" problem of public goods. Since public goods are enjoyed by all, it is not seen as the domain of any one individual, but society. Therefore, the state must coerce people to help provide public goods since the attitude is that others are paying for it and I can still enjoy the good without paying, since the good is not usually excludable.
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References
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