Concepts

“We have government of the people, by the bureaucracy, for the bureaucracy.”

one of the most influential economists of the 20th century.

“"His radical idea that governments should spend money they don't have may have saved capitalism.“ Times Magazine, 1999

Milton Friedman, Nobel Prize in Economics, 1971

John Maynard Keynes,

The purpose of this study is to identify policies and parameters that should be considered when any governmental entity is planning to undertake some type of privatization process.

Purpose of StudyPrivatization

Scope of Privatization StudyThe purpose of this study is to identify

those parameters and policy issues to be considered in connection with proposals to transfer federal, state, or local government services, assets, and/or function to the private sector. It will review the stated goals and the community impact of such transfers and identify strategies to ensure transparency, accountability, and preservation of the common good.

ConceptsPrivatization: The Public Policy

Debate

Privatization is a movement to deregulate private industry and/or transfer many government services, assets and functions to the private sector.

Definition of PrivatizationClassicTotal transfer of assets and authority from

the government sector to the for profit or nonprofit sector

Purposes: Shrink government; Reduce risk and cost Reason: Often a response to economic downturn;

Ideology

Definition of PrivatizationModified

Private sector provision of a service once/also provided by government along with private sector funding (Proprietary colleges)

Private sector provision of a service with public sector funding (Direct funding for a private college; Private trash collection paid for by tax revenue)

Public sector provision of a service with private sector funding (Student tuition at public colleges)

DefinitionDeregulation

…the lessening of regulatory provisions that govern individuals, entities, and systems.

DefinitionsDecentralization

Moving the authority for a function from a central agency to an agency closest to where the activity is actually performed.

Privatizing Actions• deregulating – reducing regulations (often used as a defining

characteristic of privatization),• contracting with the private sector to purchase a service (road

construction), • establishing incentives to encourage the private sector to

provide a service, • abandoning or shedding of services, • reducing demand for a service, • establishing quasi-public organizations (government enterprise,

charters), • establishing separate corporations - profit and nonprofit

(authority), • supplying temporary help on the part of the private sector,

• issuing vouchers (K-12 education), • issuing waivers, • selling or giving away government owned assets, • establishing franchises, • leasing, • subsidizing or making available grants to the private

sector, • relying on user fees rather than tax dollars to fund a

service (hunting licenses), • discontinuing subsidies to public entities (almost

doing this with public higher education in Colorado), • providing joint funding, • establishing public/private partnerships, and• setting up consumer self-help processes, or using

volunteers

HistoryShift from central control to less central

control – late 1960s/early 1970sEnd of “regulatory capitalism” (Yergin 1998,

8) – regulatory backlashReducing the size of governmentRevitalizing entrepreneurial spiritRestoring influence of market forcesReducing taxes

Attributes Attached to Public EntitiesPart of stateGeographic boundariesPublic actionPublic welfarePublic as beneficiaries Public accountabilityBase on certain principles: e.g., Equality,

Security, Fairness, Safety

Attributes Attached to Private (nonprofit and for profit) Entities

Part of the economyNo boundaries except those self imposedPrivate action/Operated by individualsIndividual freedomPrivately held assetsBenefits individuals

What should the government do?

Public SafetyDefenseJusticeProtect public health/environmentEducationEnsure democracyOther?

David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000

Power Point presentation by Peter Smith

19.16

Nationalization and privatizationNationalization

the acquisition of private companies by the public sector

Privatizationthe return of state enterprises to private

ownership and control

19.17

The firm makes profits as shown.

occurs when there is an industry with such economies of scale relative to market demand that only one firm can survive.

DDLMC

LAC

MR

Quantity

Price

Qm

Pm

The monopoly would producewhere MC=MR, with outputQm and price Pm.

Q'

Pc

From society's point ofview the optimum position is at PcQ', where MSB = MC.but the monopoly would makea loss if forced to produce atthis point, with LAC > AR.

19.18

(2) Two-part tariff: Firm makes a fixed charge to cover the loss made by producing at Q' (the pink rectangle), and a variable charge related to marginal cost.

(1) Average cost pricing: Firm sets P=LAC at point G; deadweight loss reduced to GHE.

G

H DDLMC

LAC

MR

Quantity

Price

Q'

Pc

Alternative pricing policies:

E

19.19

NationalizationAnother possibility is to nationalize the

industry and provide a subsidy to cover the lossas was popular in Europe in 1945-80

If nationalized industries make losses, this does not prove they are failing to minimize costs or produce at the socially efficient outputbut incentives may be a problem.

19.20

Reasons for nationalizationNatural monopolyExternalities

e.g. subsidizing public transport (London Underground) may be a second-best option to road pricing.

Equity or distributional consequencese.g. protecting transport in rural areas

Co-ordinating a networke.g. British Rail could have an overview of the

whole rail system

19.21

Reasons for privatizationImprove incentives for production efficiency

makes managers accountable to shareholders.but sheltered monopolies will be sleepy no

matter who owns themso privatization will be most successful where

there is potential for competition.Pre-commitment by government not to

interfere for political reasons

19.22

Privatization in practiceAt 1997 prices, almost £67billion was

raised in revenue from privatization in 1980-97.

In terms of widening share ownership, effects were limited

The Private Finance Initiative (PFI) is claimed as an innovative way of drawing on private-sector expertise to finance and manage public projects such as roads and hospitals.

19.23

RegulationPrivatization does not remove the need for

regulationIn the UK, regulation has been through

price-cappingprivatized industries are not permitted to raise

prices beyond RPI-X I.e. real prices must fall.

Regulatory capture occurs when the regulating body comes to identify with the interests of the firm it regulateseventually becoming its champion rather than its

watchdog.