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Monday, May 26, 2014

'The State, Corporations, and Markets'

Simon Wren-Lewis:

The state, corporations and markets: ... In this post I explain why ... the optimal private/public split will depend on a number of particular and highly contextual issues, about which economics will have a lot to say but where it is unlikely to generally point in one direction. It seems worth making this - I hope uncontroversial - point when the current UK government seems keen to privatise or outsource by one means or another so much of the public sector.
There are two claims ... associated with those who argue in favour of privatisation. One is that markets provide a better allocation system (e.g. here, and follow-ups here and here). For many activities this is undoubtedly true... However much public sector activity is in areas where market imperfections and informational problems of various kinds are endemic. In that situation, market based systems may perform worse than alternatives... Economics is not a discipline that tells us market allocation is always best, but one that tells us when it may work well and when it may not. ...
The second general argument ... is that the profit motive provides an effective incentive system for ensuring efficiency. Yet this argument alone is not enough. It is perfectly possible to run parts of government like a company, where the explicit aim is to maximise profits. Take the East Coast mainline rail company in the UK, for example. ... It appears to have been run very successfully under public ownership...
What this all suggests to me is that the costs and benefits of privatisation will vary from case to case, and that this is an area where microeconomic analysis will be central. ... In such cases, an ideology that says that the private sector ... is always better can be exploited by rent seeking firms. It can lead governments to privatise on unfavourable (to the public) terms, or with inadequate mechanisms in place to ensure value for money and prevent exploitation. At worst, rent seeking firms may be able to exert sufficient control over the political process to make this happen. ...

    Posted by on Monday, May 26, 2014 at 04:00 PM in Economics, Market Failure | Permalink  Comments (17)



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