Privatization

A DEFINING CHARACTERISTIC of economic systems is the ownership of property. In command economies, it is the state (that is, the public sector), while in free and competitive market economies it is the private sector that owns the factors of production and produces goods and services in the economy. In practice, however, even in pure market economies, certain goods must be produced by state economic enterprises.

Thus the state engages directly in the production of certain goods, the so-called public goods. Public goods have two unique features: they are nonrival and non-ex-cludable. That is, once they are produced they are available for everyone, and their consumption by one does not exclude consumption by others. Hence they are accessible by everyone regardless of economic status.

Examples of public goods run a wide array, from water and clean air to public parks and schools. Public goods are an example of market failure: profit-maximiz-ing private businesses would have no incentive to produce them because it is impossible to avoid free riders in the market, so the production of such goods would not be profitable.

The traditional solution to this problem has been to have public goods produced by the state. The transfer of the production rights of public goods to the private sector has serious repercussions, especially on economically disadvantaged groups that can no longer afford the [Page 870]consumption of these goods. Privatization inevitably is accompanied by price rises that convert public losses to private profits. Price increases ration out those who cannot pay that price, barring their access to the market and increasing their economic vulnerability.

Garrett Hardin, in his 1968 “Tragedy of the Commons” article published in Science, argued that unregulated public ownership of property can be inefficient and wasteful, leading to overuse because of the lack of built-in incentive/disincentive mechanisms. The advocates of privatization have used his argument to mean that private ownership is essential for the rational use of resources.

Rational private property owners guided by a long-term profit motive would make decisions such that waste and ineffiency are minimized if not completely avoided. In this way, Hardin's argument has been embraced by the private sector, especially in the 1980s as privatization became a trend.

While privatization is generally perceived as the transfer of public assets to the private sector in order to increase the efficiency of the economy to allocate goods, various specific privatization methods are in place. From a theoretical perspective, property rights can be reassigned to the private sector, or government economic functions can be relocated to the private sector to diminish the burden of the government.

Asset sale is the prominent tool of the first method, especially in developing countries, but vouchers, pri-vate-public partnership (that is, managed competition), and contracting out are other common tools that help governments relocate their functions to the private sector, at least for a limited time period. In the 1980s, the Margaret Thatcher administration in the United Kingdom and the Ronald Reagan administration in the United States started the trend in privatization.

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