Advantages of Privatisation

May 12th, 2008 | economics -

Readers Question: What are the advantages of privatisation?

Privatization involves selling state owned assets to the private sector. The advantages of privatisation are hoped to be:

1. Improved Efficiency.

The main argument for privatisation is that private companies have a profit incentive to cut costs and be more efficient. If you work for a government firm, managers do not usually share in any profits. However, a private firm is interested in making profit and so it is more likely to cut costs.

2. Lack of Political Intereference.

It is argued governments make poor economic managers. They are motivated by political pressures rather than sound economics. For example a state enterprise may employ surplus workers which is inefficient. However, they may be reluctant to get rid of the workers because of the negative publicity. Therefore, state owned enterprises often employ too many workers.

3. Short Term View.

A government many think only in terms of next election. Therefore, they may be unwilling to invest in infrastructure improvements which will benefit the firm in the long term.

4. Shareholders.

It is argued that a private firm has pressure from shareholders to perform. If the firm is inefficient then the firm could be subject to a takeover. A state owned firm doesn’t have this.

5. Increased Competition.

Often privatisation of state owned monopolies occurs alongside deregulation – i.e. policies to increase the competitiveness of the market. It is this increase in competition that can be the greatest spur to improvements in efficiency.

However, note privatisation doesn’t necessarily increase competition, it depends on the nature of the market. E.g. there is no competition in water. But, there is competition in telecoms. (both privatised in the 1980s)

6. Government will raise revenue from the sale

16 comments ↓

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#14 pradeep bhatt on 01.24.10 at 6:28 am

tell me what prevents the market in a privatized economy to not succumb to the complicity of two big players in a particular sector and what stops companies in an regulated market to not manipulate its results for maximization of capital from its shareholders??????

#15 candie on 03.03.10 at 8:08 pm