Privatisation

• Privatization


  When state run organizations, government run organizations or state run activity is sold off to the private sector
• Intentions of privatization


  • To make markets more competitive
  • To make markets more efficient
• Diagram showing intentions of privatization

  1. Move towards competitive outcomes

  2. Price and quantity move towards competitive levels

  3. P = MC
• Advantages of privatization


  • Increase in allocative efficiency with more competition
  • Greater driver for efficiency
  • Firms strive to produce goods and services that consumers want
  • Firms strive to produce high quality goods and services
  • Reduction in waste and exit inefficiency
  • Incentive for dynamic efficiency gains over time
  • Lower prices over time
• Potential problems with privatization

  • No guarantee of high competition immediately after privatization
  • Potential for productive inefficiency if competition is limited
  • Potential for allocative inefficiency if competition is limited
  • Firms may not want to provide socially desirable but loss-making goods/services
  • Loss of economies of scale benefits if natural monopoly is broken up
• Level of competition post-privatization

  Key to success of privatization
• Level of government regulation post-privatization

  Key to success of privatization
• Government regulation can force firms to account for external costs and benefits
• How to define success of privatization is another consideration