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De-Regulation

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?. Problem of public companies

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De-Regulation

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  1. De-Regulation Lecture 10

  2. 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

  3. Why De-regulate? • Problem of public companies • Stimulant new investment • Curb labor unions • The public gains • Government financially gains • X-inefficiency • Easier to regulate

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

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

  10. Government Financially Gains • Tax revenue • 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

  11. 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

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

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

  14. 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

  15. 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

  16. 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

  17. 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 1980s.

  18. 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

  19. 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)

  20. 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

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

  22. 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.

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

  24. 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

  25. 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

  26. 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.

  27. 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).

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