Deregulation
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

• 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

Problems

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.

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).