Critics argue that public welfare should not be left up to private firms whose primary motive...

Critics argue that public welfare should not be left up to private firms whose primary motive is profit, yet there has been a move in government toward more privatization and contracting out for services. What are the advantages of doing so, and what are the pitfalls? Use local examples to illustrate each.

Expert Solution

Every national government has the primary responsibility of fulfilling the needs and aspirations of the citizen by providing public welfare in the form of a public good. A public good has a peculiar trait of being non-rival and non-excludable such as vaccination of smallpox or free education. The private players can also provide such a service but the lack of profitability hinder such as behavior.
In recent years more and more privatization is taking place such as water treatment and supply services that have been outsourced to private contractors by the municipal authorities. This move has brought out more efficiency by bringing new technology and cutting wasteful costs. Secondly, the market can attain optimal outcomes in the absence of excessive political interventions. Thirdly, privatization helps in bringing more accountability because the shareholder exerts pressure on the firm to perform effectively. Lastly, privatization brings about more competitive firms in the market, if one firm fails to live up to the expectation then it could be replaced by another firm.
Unfortunately, excessive privatization in the water supply industry has constituted a natural monopoly in the market. Where the firm is free to charge whatever price they desire. Secondly, in case of such price discrimination, the ultimate sufferer is the consumer who is exploited to pay exorbitantly high prices. Thirdly, the government also loses out on the revenue as the water supply is a basic need. The government could have ensured a steady flow of revenue bu venturing into this industry. Lastly, the market gets fragmented into a dominant firm and smaller firm, this violates the spirit of free competition for which privatization was introduced in the first place.
Privatization has both merits/demerits depending upon where it is being enforced. In the telecom sector privatization has brought out efficiency and economies of scale. Whereas in utility services like water supply, monopoly has been established.

Rahul Sunny answered 2 years ago

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