Frances Woolley in this superb article points to a nice case from Canada’s bus route pricing. It seems private sector is not doing a proper job.
One of the ideas that I find it hardest to get through to people is that there is nothing intrinsically efficient about private sector provision. Without competition, the private sector is just as prone to waste and inefficiency as the public sector. The only difference is the form that waste takes.
The private sector will tend to jack up prices to maximize profits. That’s wasteful because high prices deter people from consuming goods, even if those goods benefit consumers. Think, for example, of pharmaceuticals, where the monopoly power created by patent protection leads to prices so high that some people are not able to take medications that would prolong their lives, or improve their life quality.
The public sector has its own forms of waste – without shareholders pushing for high profits and low costs, it is more vulnerable to capture by rent-seeking employees. The point is that there is little evidence to suggest that the public sector is intrinsically more wasteful than the private sector.
For competition, information matters:
Unfortunately, when people grasp the point that competition is good, they fall into another trap: believing that more providers and fewer regulations automatically generate pressures for lower prices and higher quality. Competition is only effective if people are fully informed. Given two bus companies with publicly available safety records, consumers can make a fully informed choice, and reward the company that offers the best service at the lowest price.
The quality of goods such as health care or education is, however, extremely difficult to measure. Some pundits seemed to be astounded when English universities reacted to fee de-regulation by charging the maximum fees allowed. It was obvious that this was going to happen! People, in the absence of other information, use price as a signal of quality. Above all, they want the best possible quality education. No university is going to advertise itself as “Cheaper than Oxford, and almost as good.” When price indicates quality, people are reluctant to cut prices.
A super blog which brings some amazing insights..