De-RegulationDe-RegulationLecture 10Lecture 10

De-RegulationDe-Regulation• Current trend is to deregulateCurrent trend is to deregulate

– Financial and energy marketsFinancial and energy markets• De-regulationDe-regulation

– To remove government controlTo remove government control– Re-define regulationsRe-define regulations

• Belief - private companies generate Belief - private companies generate more wealth than public companiesmore wealth than public companies

Why De-regulate?Why De-regulate?1.1. Problem of public companiesProblem of public companies2.2. Stimulant new investmentStimulant new investment3.3. Curb labor unions Curb labor unions 4.4. The public gains The public gains 5.5. Government financially gainsGovernment financially gains6.6. X-inefficiencyX-inefficiency7.7. Easier to regulateEasier to regulate

Problem of Public Problem of Public CompaniesCompanies

• Private companyPrivate company– Can bankrupt if company isCan bankrupt if company is

• MismanagedMismanaged• Produces inferior productsProduces inferior products• Cannot compete with competitors, etc.Cannot compete with competitors, etc.

• Government operates businessGovernment operates business– Even if government sets up public company Even if government sets up public company

like businesslike business– Bureaucracies are bad at running Bureaucracies are bad at running

businessesbusinesses

Problem of Public Problem of Public CompaniesCompanies

• If public business isIf public business is– MismanagedMismanaged– Produces inferior productsProduces inferior products– Cannot compete with competitors, etc.Cannot compete with competitors, etc.

• The business should bankruptThe business should bankrupt• However, having ties to government, However, having ties to government,

the government may subsidize the the government may subsidize the business and keep it runningbusiness and keep it running

Stimulate New Stimulate New InvestmentInvestment

• De-regulate to attract new De-regulate to attract new investment and technologyinvestment and technology– Foreign and domestic investorsForeign and domestic investors– Investors may bring new technologyInvestors may bring new technology– The new companies could became The new companies could became

international corporationsinternational corporations• Invest in activities abroadInvest in activities abroad

Stimulate New Stimulate New InvestmentInvestment

• Usually (but not always) government Usually (but not always) government is slow to adapt new technologyis slow to adapt new technology– In U.S., government contracts with In U.S., government contracts with

private technology companies to help private technology companies to help government implement new technology. government implement new technology.

• Trend is to also under invest Trend is to also under invest

Curb Labor UnionsCurb Labor Unions• Government agencies and public Government agencies and public

companies allow labor unions to form companies allow labor unions to form more easilymore easily– Labor unionsLabor unions

• Increase workers’ wagesIncrease workers’ wages• Increase workers’ benefitsIncrease workers’ benefits• Lower work requirementsLower work requirements• Make it difficult to fire workersMake it difficult to fire workers

• Private corporations fight/resist labor Private corporations fight/resist labor unionsunions

The Public GainsThe Public Gains• Consumers pay lower pricesConsumers pay lower prices

– Compete for consumersCompete for consumers• Consumers have more choicesConsumers have more choices

– CompetitorsCompetitors• Consumers have better serviceConsumers have better service

– Compete for consumersCompete for consumers

Government Financially Government Financially GainsGains

1.1. Tax revenueTax revenue• New company to taxNew company to tax

2.2. Cash from selling assetsCash from selling assets3.3. Remove subsides, tax credits, etc.Remove subsides, tax credits, etc.4.4. Government could lower its deficit, if it Government could lower its deficit, if it

was borrowing to keep public business was borrowing to keep public business runningrunning

– Deficit – the short fall when gov. spends Deficit – the short fall when gov. spends more than what it collects in taxesmore than what it collects in taxes

X-InefficiencyX-Inefficiency• X-inefficiency - firms do not minimize X-inefficiency - firms do not minimize

the costs of producing their output. the costs of producing their output. – Lack of competitionLack of competition– No incentive to minimize costs No incentive to minimize costs – MismanagementMismanagement– Poorly motivated workersPoorly motivated workers

X-InefficiencyX-Inefficiency• Monopolies and government Monopolies and government

agencies may have this inefficiency agencies may have this inefficiency • Government agencies tend to be Government agencies tend to be

larger than public oneslarger than public ones

X-InefficiencyX-Inefficiency• Use de-regulation Use de-regulation • Expose inefficient firm or Expose inefficient firm or

government agency to competitive government agency to competitive forcesforces

• Competitors are allowed to enter the Competitors are allowed to enter the marketmarket

Easier to RegulateEasier to Regulate• Regulation of privatized companies may Regulation of privatized companies may

be more effective than oversight of be more effective than oversight of public corporationspublic corporations– ExampleExample– If public corporation was violating a labor If public corporation was violating a labor

law, would the government shut down the law, would the government shut down the public corporation?public corporation?

– Government usually has no problems Government usually has no problems shutting down private businesses when shutting down private businesses when they violate the lawthey violate the law

Methods of PrivatizationMethods of Privatization1. Direct Sale1. Direct Sale

– Whole company is auctioned to public Whole company is auctioned to public or sold to another companyor sold to another company

– The following countries have used thisThe following countries have used this• Argentina, United Kingdom, Chile, and New Argentina, United Kingdom, Chile, and New

ZealandZealand

Methods of PrivatizationMethods of Privatization2. Partial Sale2. Partial Sale

– Company is organized as a corporationCompany is organized as a corporation– Government is majority shareholderGovernment is majority shareholder– Overtime, government sells its sharesOvertime, government sells its shares– ExampleExample

• Britain sold British PetroleumBritain sold British Petroleum• Canada sold Petro-CanadaCanada sold Petro-Canada

Methods of PrivatizationMethods of Privatization3. De-regulation3. De-regulation

– Government decreases amount of Government decreases amount of regulationsregulations

– Example 1 – some states in United States Example 1 – some states in United States deregulated the electric power generationderegulated the electric power generation• Some could argue that this was re-regulationSome could argue that this was re-regulation• Government removed regulations and added Government removed regulations and added

new onesnew ones– Example 2 - President Ronald Reagan de-Example 2 - President Ronald Reagan de-

regulated U.S. financial markets in 1980s. regulated U.S. financial markets in 1980s.

Methods of PrivatizationMethods of Privatization4. Remove government subsidies4. Remove government subsidies

– Example – South KoreaExample – South Korea• Subsidized credit and tax rebates to expand Subsidized credit and tax rebates to expand

its chemical industryits chemical industry• Chemical industry continued to perform Chemical industry continued to perform

badlybadly• Government withdrew all subsidiesGovernment withdrew all subsidies• Open their chemical industry to Open their chemical industry to

international competitioninternational competition

Methods of PrivatizationMethods of Privatization5. Vouchers5. Vouchers

– Government grants ownership rights to Government grants ownership rights to the private marketthe private market

– No exchange of cashNo exchange of cash– Investors can convert company Investors can convert company

vouchers into corporate sharesvouchers into corporate shares• Then establish a stock market exchangeThen establish a stock market exchange

– Investors can convert property Investors can convert property vouchers into property titles (or deeds)vouchers into property titles (or deeds)

Methods of PrivatizationMethods of Privatization6. Joint Venture6. Joint Venture

– If a foreign company wants to invest in If a foreign company wants to invest in the country, then it has to invest with a the country, then it has to invest with a domestic, public companydomestic, public company

– Usually the foreign company, public Usually the foreign company, public company, and government are the only company, and government are the only shareholders in the joint ventureshareholders in the joint venture• Former Communist countriesFormer Communist countries• Latin American countriesLatin American countries

– A way to retain some government controlA way to retain some government control

Methods of PrivatizationMethods of Privatization

• Privatization - government has to Privatization - government has to change legal structurechange legal structure– Introduce property rightsIntroduce property rights– Introduce contract lawIntroduce contract law– Introduce a judicial system that Introduce a judicial system that

enforces contractsenforces contracts

Methods of PrivatizationMethods of Privatization• Example – When communist Example – When communist

countries granted vouchers for countries granted vouchers for apartments apartments – Had to change role of the government Had to change role of the government

agency that monitored the apartmentsagency that monitored the apartments• Introduce property titlesIntroduce property titles• Allow occupants to sale and transfer Allow occupants to sale and transfer

property, etc.property, etc.

Effects of PrivatizationEffects of Privatization• Private ownership reduces power of Private ownership reduces power of

interest groupsinterest groups– Interest groups – have an agenda to Interest groups – have an agenda to

manipulate or influence government manipulate or influence government and its regulatory agenciesand its regulatory agencies

Effects of PrivatizationEffects of Privatization• Large increases in profitLarge increases in profit• Labor productivity increasesLabor productivity increases

– Productivity is a measure of production Productivity is a measure of production level relative to the labor forcelevel relative to the labor force

– i.e. workers are actually workingi.e. workers are actually working– Gov. workers tend to work slowlyGov. workers tend to work slowly

• Lower pricesLower prices• Produce products and services at lower Produce products and services at lower

costscosts

Problems of PrivatizationProblems of Privatization• Governments tend to pay excellent Governments tend to pay excellent

wageswages– Labor unions tend to force companies to pay Labor unions tend to force companies to pay

high wageshigh wages• Competitive marketsCompetitive markets

– Pay excellent wages for specialized skills, Pay excellent wages for specialized skills, higher education, etc.higher education, etc.• Limited number of workersLimited number of workers

– Pay low wages for common, basic skillsPay low wages for common, basic skills• Large labor poolLarge labor pool

Problems of PrivatizationProblems of Privatization• PrivatizationPrivatization

– Company may reduce the number of Company may reduce the number of workersworkers

– If worker is over age 40, the worker If worker is over age 40, the worker may have trouble finding new workmay have trouble finding new work

– Employers like to hire young workersEmployers like to hire young workers• Easier to trainEasier to train• More likely to have computer skills, etc.More likely to have computer skills, etc.

ReferencesReferences• Office of Energy Markets and End Office of Energy Markets and End

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