Privatization Privatization refers to the transfer of ownership of property or businesses from the government to the privately owned entity. This phenomenon has progressively become common since the 1970’s. The privatization of services like water, gas, railway, electricity, health care, education, transport and communications have increased resistance in countries across the globe as people find access to these services determined by their capacity to pay. Simultaneously, investors and companies are making large amount of money and profits with substantial shifts of capital from public to private ownership of wealth. There are several arguments whether privatization makes the situation any better or not. Growing evidences of privatizations benefits corresponds with increasing dissatisfaction and opposition among citizens and policymakers. Few services are natural monopolies and it’s not possible for two different companies to do business at the same time like water, so competition doesn’t come into it. Privatization has benefits as well as drawbacks. Potential benefits include improved efficiency. This is because private companies have profit incentive; cuts cost and are more efficient. Companies like British Airways have shown immense efficiency and higher profitability since they are privatized. There is lack of political interference in privatization. It is believed that government creates poor economic managers as they have more political pressure than sound business sense. Consequently, state owned enterprises employ large number of employees that increases its inefficiency. Private corporations have pressures from the shareholders to perform efficiently, and if it’s vice versa, the firm is subjected to takeover. A state owned corporation does not have this pressure and so it is easier for them to be inefficient. Privatization boosts competition and allows more firms to enter the market and increase competition. On the other hand, natural monopoly arises when there is only one efficient firm in the industry. For example, water, there is no need for having competition amongst a lot of firms as it will exploit the consumers by raising prices for a necessity good. If this is the case, privatization would just create a private monopoly which might exploit consumers by setting higher prices. Thus, public monopoly is better than a private monopoly that doesn’t exploit the consumers.
On the contrary, there are also government enterprises where profit making is not the primary business objective. For example healthcare, privatizing healthcare would mean more priority to the profits rather than patients care. So privatization varies from industry to industry. The telecom industry for example, has a profit motive to increase its efficiency, on the other hand if it’s applied to industries like healthcare and water, the profit motive is less important and will only exploit the consumer. If the market is very competitive, private monopoly may harm consumer interests, but there is great possibility for efficient savings.
Source:
http://www.researchomatic.com/privatization-151168.html