On Privatizing Highways and Other Functions--BECKER

There is a well-known conflict in privatizing a government enterprise between the desires to raise revenue from the privatization and to create an efficient enterprise. Government revenue is increased by giving the privatized company a protected position against competition, while allowing other companies to compete vigorously against the privatized company increases efficiency. Greater efficiency typically means lower prices for the privatized product, and hence lower bids for the enterprise to be privatized. Governments often succumb to the desire to increase their revenue, which has caused the creation of monopolies in privatization programs all over the world. I differ with Posner in believing that the revenue from a monopolized privatization would not be fully raised elsewhere if not raised from the privatization because it is difficult to tap other sources of revenue to substitute for foregone revenues from privatizations. Put differently, governments end up with bigger total spending budgets when they increase their revenue from privatizations by giving privatized companies some monopoly power. Still, I generally strongly support privatizations, even when privatized companies have monopoly power in setting prices and other conditions of the sale. The reason is that other companies are more likely to find ways to compete against private monopolies than against government ones. A very important part of this argument is that technological progress is faster with private monopolies than with public monopolies. For example, ATT was a private regulated monopoly before the breakup of the Bells in the early 1980’s into competing entities. The breakup was desirable, but still ATT was much more efficient than were the government run companies that dominated the telephone industry at that time in the rest of the world. These and the arguments given by Posner strongly imply that highways, along with postal systems, trains, airports, ports, and other infrastructure, including even some security activities, should be privately rather than publicly operated. The main challenge arises when it is more difficult to stimulate competition for the privatized company because of so-called "natural monopoly" conditions in the industry. Due to economies of scale, it may not be efficient, for example, to have another highway built across Indiana to compete against the Indiana toll road. Yet even in that case, it would still be desirable to privatize the toll road, but controls could be imposed on the prices and other conditions that can be levied imposed on consumers by the privatively owned road. Yet I believe that in the dynamic world we live in, natural monopoly considerations are less common than often supposed because new technologies and processes can bring competition to what appear to be protected markets if the profits are large enough. In this way, the supposed natural monopoly position of traditional telephone companies due to the large fixed costs of a network of telephone wires has been eroded by the development of cable and its alternative wired network, and of course by wireless telephony and the use of the internet for phoning. Roads and airports are examples of industries that pose greater challenges to create competition among private companies. However, smaller airports in a region, such as the one at Gary Indiana, would be expanded to attract business from higher priced dominant airport in the same region, like O’Hare, if the dominant airport was charging excessive fees, and if both airports were privately run. Even a second private toll road would be built to compete against at least part of a privatized toll road that was charging excessive fees, especially over the most densely traveled portions of the privatized road. The theory of the efficient allocation of resources is radically changed when dynamic competition with induced technological progress is the framework of analysis instead of the traditional static theory of competition. Dynamic competition analysis is more comfortable with accepting short -term monopoly power of privatized enterprises that are allowed to set their own prices. The reason is that the monopoly profits from high prices by the privatized enterprise would stimulate other entrepreneurs to find ways to compete against the enterprise, and in this way claim some of the monopoly profits through lower prices and better service. "Natural monopoly" looms large in the theory of static allocation of resources, but is considerably less important in the actual world because of technological progress that is induced by monopoly power and excessive profits. When dynamic competition is effective, a public enterprise, like a toll road or the postal system, should be sold without any restrictions on future pricing, unlike what happened in the sale of the Indiana toll road. I do not go so far as to claim that dynamic competition always arises in a powerful way to compete against privatized roads or other privatized infrastructure that have no restrictions on pricing. But I do believe it is far more common and effective than in textbook discussions of competition and entry. If that is the case, it would then pay to privatize most of the public infrastructure of roads, communication, mail delivery, electric power generation, and the like, with few controls over the prices that can be charged to consumers. That would create some pockets of persistent monopoly profits, but it would take politics out of rate setting. It would also stimulate the development of different ways to compete against what appears to be an unassailable monopoly enterprise.

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