DeRegulation Lecture 10 DeRegulation Current trend is to

De-Regulation Lecture 10

De-Regulation • Current trend is to deregulate – Financial and energy markets • De-regulation – To remove government control – Re-define regulations • Belief - private companies generate more wealth than public companies

Why De-regulate? 1. 2. 3. 4. 5. 6. 7. Problem of public companies Stimulant new investment Curb labor unions The public gains Government financially gains X-inefficiency Easier to regulate

Problem of Public Companies • Private company – Can bankrupt if company is • • • Mismanaged Produces inferior products Cannot compete with competitors, etc. • Government operates business – Even if government sets up public company like business – Bureaucracies are bad at running businesses

Problem of Public Companies • If public business is – Mismanaged – Produces inferior products – Cannot compete with competitors, etc. • The business should bankrupt • However, having ties to government, the government may subsidize the business and keep it running

Stimulate New Investment • De-regulate to attract new investment and technology – Foreign and domestic investors – Investors may bring new technology – The new companies could became international corporations • Invest in activities abroad

Stimulate New Investment • Usually (but not always) government is slow to adapt new technology – In U. S. , government contracts with private technology companies to help government implement new technology. • Trend is to also under invest

Curb Labor Unions • Government agencies and public companies allow labor unions to form more easily – Labor unions • • Increase workers’ wages Increase workers’ benefits Lower work requirements Make it difficult to fire workers • Private corporations fight/resist labor unions

The Public Gains • Consumers pay lower prices – Compete for consumers • Consumers have more choices – Competitors • Consumers have better service – Compete for consumers

Government Financially Gains 1. Tax revenue • 2. 3. 4. New company to tax Cash from selling assets Remove subsides, tax credits, etc. Government could lower its deficit, if it was borrowing to keep public business running – Deficit – the short fall when gov. spends more than what it collects in taxes

X-Inefficiency • X-inefficiency - firms do not minimize the costs of producing their output. – Lack of competition – No incentive to minimize costs – Mismanagement – Poorly motivated workers

X-Inefficiency • Monopolies and government agencies may have this inefficiency • Government agencies tend to be larger than public ones

X-Inefficiency • Use de-regulation • Expose inefficient firm or government agency to competitive forces • Competitors are allowed to enter the market

Easier to Regulate • Regulation of privatized companies may be more effective than oversight of public corporations – Example – If public corporation was violating a labor law, would the government shut down the public corporation? – Government usually has no problems shutting down private businesses when they violate the law

Methods of Privatization 1. Direct Sale – Whole company is auctioned to public or sold to another company – The following countries have used this • Argentina, United Kingdom, Chile, and New Zealand

Methods of Privatization 2. Partial Sale – Company is organized as a corporation – Government is majority shareholder – Overtime, government sells its shares – Example • Britain sold British Petroleum • Canada sold Petro-Canada

Methods of Privatization 3. De-regulation – Government decreases amount of regulations – Example 1 – some states in United States deregulated the electric power generation • Some could argue that this was re-regulation • Government removed regulations and added new ones – Example 2 - President Ronald Reagan de-regulated U. S. financial markets in 1980 s.

Methods of Privatization 4. Remove government subsidies – Example – South Korea • Subsidized credit and tax rebates to expand its chemical industry • Chemical industry continued to perform badly • Government withdrew all subsidies • Open their chemical industry to international competition

Methods of Privatization 5. Vouchers – Government grants ownership rights to the private market – No exchange of cash – Investors can convert company vouchers into corporate shares • Then establish a stock market exchange – Investors can convert property vouchers into property titles (or deeds)

Methods of Privatization 6. Joint Venture – If a foreign company wants to invest in the country, then it has to invest with a domestic, public company – Usually the foreign company, public company, and government are the only shareholders in the joint venture • Former Communist countries • Latin American countries – A way to retain some government control

Methods of Privatization • Privatization - government has to change legal structure – Introduce property rights – Introduce contract law – Introduce a judicial system that enforces contracts

Methods of Privatization • Example – When communist countries granted vouchers for apartments – Had to change role of the government agency that monitored the apartments • Introduce property titles • Allow occupants to sale and transfer property, etc.

Effects of Privatization • Private ownership reduces power of interest groups – Interest groups – have an agenda to manipulate or influence government and its regulatory agencies

Effects of Privatization • Large increases in profit • Labor productivity increases – Productivity is a measure of production level relative to the labor force – i. e. workers are actually working – Gov. workers tend to work slowly • Lower prices • Produce products and services at lower costs

Problems of Privatization • Governments tend to pay excellent wages – Labor unions tend to force companies to pay high wages • Competitive markets – Pay excellent wages for specialized skills, higher education, etc. • Limited number of workers – Pay low wages for common, basic skills • Large labor pool

Problems of Privatization • Privatization – Company may reduce the number of workers – If worker is over age 40, the worker may have trouble finding new work – Employers like to hire young workers • Easier to train • More likely to have computer skills, etc.

References • Office of Energy Markets and End Use. October 1996. Privatization and the Globalization of Energy Markets. Washington, DC: U. S. Department of Energy, Energy Information Administration, Report DOE/EIA 609(96).