Privatization. Privatization is the sale of state-owned assets/enterprises/industries to the private sector.
Benefits of Privatization
- Invisible hand. As the efficient market hypothesis posits, market forces allocate resources efficiently. A state-owned industry may misallocate resources and cause inefficiencies because decisions are made for political reasons rather than economic.
- Reduced cost. A private firm aims to profit maximize so it must keep costs low and target productive efficiency. A state-owned enterprise may suffer X-inefficiency if there is no competition, also acting in the interest of workers may mean that costs are too high.
- More choice/quality. A state-owned enterprise may produce a limited range of goods because that may be what they think consumers want. A private firm facing competition must be allocatively efficient, produce what consumers want and in the desired quantities. If a private firm does not offer a wide choice and good quality then consumers switch to rivals.
- Innovation. Private firms must be dynamically efficient and innovate, produce new and better goods for consumers to gain a competitive edge over rivals. The Titanic, built by Harland and Wolff for the White Star Line, was the most luxurious ocean liner of her time, even for third class passengers. White Star Line built Titanic to compete against rival frim Cunard’s Mauretania. A public sector firm would never have dreamt of building the Titanic.
Costs of Privatization
- Monopoly. A firm may already be a state-owned monopoly, so when it is privatised it remains a monopoly, increases prices, decreases output and decreases consumer surplus.
- Inequity. Private firms may price discriminate. Also, firms may be bought by the richest part of the population, causing a more unequal distribution of wealth.
- Negative externalities. Private firms may be more likely to damage the environment and engage in the illegal dumping of toxic waste.