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Lecture 11


Why Deregulate?


  • Current trend is to deregulate
    • Financial and energy markets
  • Deregulation
    • To remove government control
    • Re-define regulations
  • Belief - private companies generate more wealth than public companies

1. Problems of Public Companies

  • Private company
    • Can bankrupt if company is
      • Mismanaged
      • Produces inferior products
      • Cannot compete with competitors, etc.
  • Government operates business
    • Even if government sets up public company like business
    • Bureaucracies are bad at running businesses
    • If public business is
      • Mismanaged
      • Produces inferior products
      • Cannot compete with competitors, etc.
      • The business should bankrupt
    • However, having ties to government, the government may subsidize the business and keep it running

2. Stimulate New Investment

  • De-regulate to attract new investment and technology
    • Foreign and domestic investors
    • Investors may also bring new technology
    • The new companies could became international corporations
      • Invest in activities abroad
  • Usually (but not always) government is slow to adapt new technology
    • In U.S., government contracts with private technology companies to help government implement new technology.
  • Trend is to also under invest

3. Curb Labor Unions

  • Government agencies and public companies allow labor unions to form more easily
  • Labor unions
    • Increase workers’ wages
    • Increase workers’ benefits
    • Lower work requirements
    • Make it difficult to fire workers
  • Private corporations fight/resist labor unions

4. The Public Gains

  • Consumers pay lower prices
    • Firms compete for consumers
  • Consumers have more choices
    • Competitors
  • Consumers have better service
    • Firms compete for consumers

5. Government Financially Gains

  1. Tax revenue
    • New company to tax
  2. Cash from selling assets
  3. Remove subsides, tax credits, etc.
  4. Government could lower its deficit, if it was borrowing to keep public business running
    • Deficit – the short fall in a budget when gov. spends more than what it collects in taxes

6. X-Inefficiency

  • X-inefficiency - firms do not minimize the costs of producing their output.
    • Lack of competition
    • No incentive to minimize costs
    • Mismanagement
    • Poorly motivated workers
  • Monopolies and government agencies may have this inefficiency
    • Government agencies tend to be larger than public ones
  • Use de-regulation
    • Expose inefficient firm or government agency to competitive forces
    • Competitors are allowed to enter the market

7. Easier to Regulate

  • Regulation of privatized companies may be more effective than oversight of public corporations
  • Example
    • If public corporation was violating a labor law, would the government shut down the public corporation?
    • Government usually has no problems shutting down private businesses when they violate the law


Methods of Privatization


1. Direct Sale
  • Whole company is auctioned to public or sold to another company
  • The following countries have used this
    • Argentina, United Kingdom, Chile, and New Zealand

2. Partial Sale

  • Company is organized as a corporation
  • Government is majority shareholder
  • Overtime, government sells its shares
  • Example
    • British government sold British Petroleum
    • Canadian government sold Petro-Canada

3. De-regulation

  • Government decreases amount of regulations
  • Example 1 – Some states in United States deregulated the electric power generation
    • Some could argue that this was re-regulation
    • Government removed regulations and added new ones
  • Example 2 - President Ronald Reagan de-regulated U.S. financial markets in 1980s.

4. Remove government subsidies

  • Example – South Korea
  • Subsidized credit and tax rebates to expand its chemical industry
  • Chemical industry continued to perform badly
  • Government withdrew all subsidies
  • Open their chemical industry to international competition

5. Vouchers

  • Government grants ownership rights to the private market or its citizens
  • No exchange of cash
  • Investors can convert company vouchers into corporate shares
    • Then establish a stock market exchange
  • Investors can convert property vouchers into property titles (or deeds)

6. Joint Venture

  • If a foreign company wants to invest in the country, then it has to invest with a domestic, public company
  • Usually the foreign company, public company, and government are the only shareholders in the joint venture
    • Former Communist countries
    • Latin American countries
  • A way for the government to retain control, but introduce foreign investment and technology.

Privatization - government has to change legal structure

  • Introduce property rights
  • Introduce contract law
  • Introduce a judicial system that enforces contracts
  • Example
    • When communist countries granted vouchers for apartments
    • Had to change role of the government agency that monitored the apartments
      • Introduce property titles
      • Allow occupants to sale and transfer property, etc.


Effects of Privatization


  1. Private ownership reduces power of interest groups
    • Interest groups – have an agenda to manipulate or influence government and its regulatory agencies
    • Could reduce government corruption too
  2. Large increases in profit
  3. Labor productivity increases
    • Productivity is a measure of production level relative to the labor force
    • i.e. workers are actually working
  4. Lower prices
  5. Produce products and services at lower costs


  1. Governments tend to pay excellent wages
    • Labor unions tend to force companies to pay high wages
    • Competitive markets
      • Pay excellent wages for specialized skills, higher education, etc.
        • Limited number of workers
      • Pay low wages for common, basic skills
        • Large labor pool
  2. Company may reduce the number of workers (Lay off)
    • If worker is over age 40, the worker may have trouble finding new work
      • Employers like to hire young workers
        • Easier to train
        • More likely to have computer skills, etc.


Office of Energy Markets and End Use. October 1996. Privatization and the Globalization of Energy Markets. Washington, DC: U.S. Department of Energy, Energy Information Administration, Report DOE/EIA-609(96).


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