Markets do not efficiently distribute public goods. Public goods are items that people can get without paying for them. When goods are public, an individual has an incentive to be a free rider - a consumer who enjoys the benefit of the good or service without paying. However, defining a public good is not always clear-cut. A fundamental economic concept is that if the government does not allow individual property rights, the market cannot efficiently distribute goods, resulting in market failure. In the following discussion, consider how the efforts of governments to privatize goods once considered public may result in superior products.
What are the incentives of government bureaucrats who run public services such as the water services, the parking services, and the airports? Do these incentives differ from those of private companies in running these services? Why or why not?
Review the case study titled "Privatizing Public Activities". Answer the following questions: Below.
Privatizing Public Activities
California is looking to shed state office buildings. Milwaukee has proposed selling its water supply; in Chicago and New Haven, Connecticut, it's parking meters. In Louisiana and Georgia, airports are up for grabs. Many communities are using asset sales to balance current budgets. In many cases, the private takeover of government-controlled industry or services can result in more efficient and profitable operations.
The most popular deals in the works are metered municipal street and garage parking spaces. One of the first was in Chicago where the city received $1.16 billion in 2008 to allow a consortium led by Morgan Stanley to run more than 36,000 metered parking spaces for 75 years. Around the country, at least a dozen public parking systems are up for bid, including in San Francisco and Las Vegas. In Pittsburgh, the mayor is proposing to lease out the parking system for an up-front sum of about $300 million over 50 years and funnel the money into the pension system. Among assets being sold all over the country are state and city office buildings. Arizona received national attention in late 2009 when it announced plans to raise more than $1 billion turning over control of public buildings and leasing them back. Much of the money is being used to plug the state's budget hole. Airports also are being privatized under a limited federal program. Deals under consideration for lease include airports in New Orleans and Puerto Rico. Dallas is selling prized outdoor spaces. After turning over operation of the zoo to a private firm, the city is now selling the Farmers' Market and Fair Park.
Why do governments do more than the Constitution stated they should do? Protecting private property rights and a few other minor items were the responsibility of government. Governments typically do not do as good a job as private companies in any activity. Many municipalities have long done a poor job of running their roads, parking spaces, and bridges. Maintenance contracts, for example, are highly political, and with revenues shrinking, infrastructure is increasingly deteriorating. Moreover, private businesses are better at balancing parkers with spaces, advertising, and matching prices with demand.
Critics say buyers are taking advantage of municipalities at a vulnerable time and lack the incentive that governments have to maintain quality. Moreover, some properties are being sold at fire-sale prices into a weak market and will lead to higher costs later.
Municipalities argue that the money they raise could help build more long-term assets, boost efficiency, and avoid raising taxes. Moreover, some wonder why cities should be in all the businesses they are? Why, for instance, should the City of Los Angeles be in the parking business, Milwaukee in the water business, Dallas in the zoo business, and so on?
It is often stated that private for-profit interests will not serve the public. A private water company will not provide the quality the government provides. Besides, water users cannot vote private managers or state-appointed regulators out of office. The experience with private water companies is that they raise prices and provide better service.
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