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Deregulation Lecture 11
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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
- Consumers have better service
- Firms compete for consumers
5. Government Financially Gains
- Tax revenue
- Cash from selling assets
- Remove subsides, tax
credits, etc.
- 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
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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.
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Effects of Privatization |
Benefits
- 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
- Large increases in profit
- Labor productivity increases
- Productivity is a measure of production level relative to the labor
force
- i.e. workers are actually working
- Lower prices
- Produce products and services at lower costs
Problems
- 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
- 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.
References
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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