Transcript 5520_l11-2015_Priv_Prices

Privatization  Prices
© Allen C. Goodman, 2015
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Privatization
Think of some
of your own
examples!
• Definition: Transfer production of
government services to private firms.
Degrees of Public and Private Involvement
Case Choice
Financing
Production
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2
3
4
Public
Public
Public
Private
Public
Public
Private
Private
Public
Private
Private
Private
Example
Police
Trash
Sidewalks
Private Goods
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How might privatization ↓ costs?
• Lower labor costs
– Lower wages?
– Lower fringes?
• Different production approaches
– Different mixes of capital and/or labor?
– Fewer or different political problems?
• More R&D
– More focused on lowering costs?
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Why might it not work well?
• Contracting issues.
– How much competition is there in the supply
sector? If there are monopolistic suppliers
you may not get competitive bidding.
– Specifying the amount or quality of services.
What is “good” education? For example, how
do you evaluate vouchers or charter schools.
– Monitoring the services. How do you know
they’re giving you what you contracted
for?issues
Some of the same
occur in the public sector
provided publicly. 4
What gets privatized?
• Some is pretty obvious
– Towing cars
– Waste facilities
– Athletic facilities
– Driver training
• Other stuff is less obvious, more
controversial
– Education
– Fire protection
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So, what seems to work?
• Lower costs seem to come from lower
wages or lower benefits.
• Some have found that if there is more
competition in provision, costs are lower,
but that depends critically on there being
competition.
• If the competitors “carve up” the territory,
then you won’t have competition, or lower
costs.
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Who pays for benefits?
Labor Market
• Start with no benefits.
• Suppose that they
negotiate $2/hour in
benefits.
• Why?
Demand
Supply
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W0
Benefits
2
• Who pays?
Wages
L0
Labor
User Charges
• Economists like markets. With a market,
those who want the good will pay for it;
those who don’t, won’t.
• Let’s look at parking at Wayne. Should it
be free? After all you’ve spent a lot of
tuition.
• If it’s free, is someone subsidizing
someone else?
• If it’s free, are there any costs?
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Good user charge model
• Let’s go back to the
optimal level of public
services.
• MBS = MB to “society” –
it’s good to have
parking for guests who
visit.
• MBU = MB to users –
those who park
everyday.
$
Price
Why is it kinked?
MBU+MBS= MC
MBU
MC
MBS
Q*
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Quantity
Good user charge model
• Let’s put in a couple of
other benchmarks.
• At Q1, society’s needs
are met. Anything more
accrues solely to users.
• If we charge 0 price,
we’ll get a demand of
Q 2.
$
Price
MBU+MBS= MC
MBU
MC
Efficiency
Loss
MBS
Q*
Q1
Q
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2
Quantity
Good user charge model
• We’ve seen MB*U and
MB*S before.
• “Clearly” users should
pay (MB*U/MC) fraction
of the costs of the
facility.
• What does this tell us
about potential user
charges?
$
Price
MBU+MBS= MC
MBU
MC
MB*U
MB*S
MBS
Q*
Q1
Q
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2
Quantity
Good user charge model
1.
2.
3.
Greater the fraction of
MC that MBU are, the
more attractive are
user charges.
User-charge financing
requires that we be
able to identify users
easily.
Efficiency case for
user charges is
MB*U
stronger the more
elastic is demand.
MB*S
Why?
$
Price
A> It’s all about
Quantity!
MBU+MBS= MC
MBU
MC
MBS
Q*
Q1
Q
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2
Quantity
Good user charge model
4.
Marginal benefits,
NOT total benefits,
matter. Past Q1, all of
the incremental
benefits go to the
users, as opposed to
society. They should
finance entirely ALL
of the costs of
facilities past Q1.
$
Price
MBU+MBS= MC
MBU
MC
MB*U
MB*S
MBS
Q*
Q1
Q
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2
Quantity
Three Kinds of Costs
• Capital Costs – What does it cost to HAVE
the facility? How do we pay for it?
– Probably $/head, $/property, $/value of
property.
• Operating Costs – What does it cost to
USE the facility? Some sort of user
charge. Might it be 0?
• Congestion Costs – What are congestion
costs? How do we charge?
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Prime Example – Highways
• What are the MPC?
• What are the MSC?
$
MSC
D (5 pm)
D (5 am)
• Why does demand differ
at different times of the
day?
• What is the efficient
price? Why?
MPC
Cars/hr.
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Prime Example – Highways
• People are valuing
others’ time at 0. The
price system is not
working properly.
• Appropriate
congestion tax is t.
$
MSC
D (5 pm)
D (5 am)
• What are the impacts?
– Gives drivers incentives to
drive at less congested
times.
– Redistributes costs from nonusers to users
Loss
t
MPC
Cars/hr.
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What do you do with tax
• Here, a tax is used to fix price system.
• Think of a situation where you take the
congestion taxes and use them to
redistribute to everyone else.
• So, the users are worse off … but the nonusers, who were subsidizing them, are
now better off … and
• The price system is now giving the right
scarcity signals.
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Rich v. Poor
Suppose you have a bunch of people from Rochester Hills
commuting down I-75 to downtown Detroit every day.
Must be there by 8:30 am, so they plan to get there a
little early. Some are “rich.” Others are “poor.”
Under a “come as you please” system, rich and poor come
down randomly  congestion between 7:30 – 8:30.
Suppose a poor person who values time at $0.20/minute
($12.00/hour) arrives at 8:15 and a rich person who
values time at $0.40/minute ($24.00/hour) arrives at
7:15. Total waiting time costs are
Poor 0.25 hr. * $12 = $3.00
Rich 1.25 hr. * $24 = $30.00
Total Cost is $33.00
How about a time of day toll?
Doesn’t this discriminate
against the poor?
Rich v. Poor
If you SWAP places you get:
Poor 1.25 hr. * $12 = $15.00
Rich 0.25 hr. * $24 = $ 6.00
Total Cost is $21.00!  Savings of $12.00
Suppose you put on a $10.00 toll between 7:30 am and
9:30 am. Poor will travel earlier to avoid the toll and rich
will probably travel later.
The rich would be (30 – 6) – 10 = $14 better off.
The poor would be (3 – 15) = $12 worse off.
The rich could compensate the poor, even after paying the
toll. You could actually use the toll to compensate them.
This is usually a suitable condition for Pareto Optimality.
How do you collect tolls?
Have you ever been around Chicago?
Look at all the toll roads.
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How do you collect tolls?
• They use the I-Pass.
• Could vary by time of day – I don’t think
that it does.
• Could post it by time of day.
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