PRIVATIZATION OF THE ELECTRIC POWER INDUSTRY In

PRIVATIZATION OF THE ELECTRIC POWER INDUSTRY

In the contemporary debate over privatization of the electric power industry, advocates of privatization pursue their arguments through the public choice, or property rights, model.1 The advocates of privatization contend that attenuation of property rights in public ownership situations creates disincentives to economic efficiency, as well as creating monitoring problems which inhibit the attainment of economic efficiency.2 In the context of economic efficiency, it is contended that publiclyowned firms have higher costs than private firms for any given level of output and often use more of all resource inputs.3 The opposing view is that publiclyowned firms charge lower prices and produce higher output than private firms.4

Much work has been done by contemporary economists in an attempt to validate through application of the property rights model the contention that private ownership leads to improved efficiency in the electric power industry. Since 1980, almost onehalf of such studies have found no differences in economic

1Anthony E. Boardman and Aidan R. Vining, "Ownership and Performance in Competitive Environments: A Comparison of the Performance of Private, Mixed, and StateOwned Enterprises," Journal of Law and Economics 32 (April 1989): 2.

2Terry L. Anderson and Peter J. Hill, "Privatizing the Commons: An Improvement?" Journal of Law and Economics 32 (December 1989): 441.

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that those individuals gaining from a change in resource benefit by a large enough amount to compensate losers from the change. Importantly, however, it is not required that gainers actually compensate losers. All that is required is that they gain enough so that theoretically such compensation would be possible. This concept is referred to as the potential Pareto criterion. This approach is one of radical individualism that permits changes in resource distribution that only theoretically and not actually causes no one to be worse off. In real life situations where some people do become worse off as a result of a change in resource use, economic efficiency fails the equity standard. Kenneth Arrow contended that profitmaximizing behavior by firms may produce socially inefficient outcomes in situations where such firms are not required to bear the full social costs of production.10 Arrow contended further that ethical codes are required and should be enforced by government to assure that socially efficient outcomes result. The concept of privatization is delineated in the contexts of payment and delivery. In the context of payment, a public good is defined generally by collective payment, while a private good is defined

Category: Economics - P