Privatization

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    Privatization

    Definition: The incidence or process of transferring ownership of a business, enterprise, agency, public

    service property from the public sector (the state or government) to the private sector

    (businesses that operate for a private profit) or to private non-profit organizations.

     

    Advantages

    • Increased efficiency. Private companies and firms have a greater incentive to produce more goods and services for the sake of reaching a customer base and hence increasing profits. A public organization would not be as productive due to the lack of financing allocated by the entire government’s budget that must consider other areas of the economy.
    • A private business has the ability to focus all relevant human and financial resources onto specific functions. A state-owned firm does not have the necessary resources to specialize its goods and services as a result of the general products provided to the greatest number of people in the population.
    • Conversely, the government may put off improvements due to political sensitivity and special interests—even in cases of companies that are run well and better serve their customers’ needs.
    • Privately held companies can sometimes more easily raise investment capital in the financial markets. While interest rates for private companies are often higher than for government debt, this can serve as a useful constraint to promote efficient investments by private companies, instead of cross-subsidizing them with the overall credit-risk of the country. Investment decisions are then governed by market interest rates. State-owned industries have to compete with demands from other government departments and special interests. In either case, for smaller markets, political risk may add substantially to the cost of capital.

     

    Disadvantages

    • Job Loss. Due to the additional financial burden placed on privatized companies to succeed without any government help, unlike the public companies, jobs could be lost to keep more money in the company.
    • Natural monopolies. Privatization will not result in true competition if a natural monopoly exists.
    • Private companies do not have any goal other than to maximize profits. A private company will serve the needs of those who are most willing (and able) to pay, as opposed to the needs of the majority.
    • The government may seek to use state companies as instruments to further social goals for the benefit of the nation as a whole.

     

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