[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

possible—sometimes too much. In addition, some groups, often businesses, may be
required to pay extra-high prices so that other groups can be subsidized. Cross subsidies
are no less a problem for natural monopolies if they are privately owned and
regulated than if they are owned and operated by the government. Furthermore,
companies have little incentive to innovate if their success in lowering costs is always
followed by lower regulated prices rather than by higher profits. U.S. regulators
have recognized that unless they reward innovation, it will not happen. They have
agreed to allow the utilities to retain much of the increased profits they obtain from
improved efficiency, at least for a few years.
The second criticism is that the regulators lose their focus on the public interest.
The theory of regulatory capture argues that regulators are frequently pulled
into the camps of those they regulate. Sometimes bribery and corruption are to
blame, but far more common is that over time, employees of a regulated industry
develop personal friendships with the regulators, who in turn come to rely on their
expertise and judgment. Worse, regulatory agencies (of necessity) tend to hire from
among those in the regulated industry. By the same token, regulators who demonstrate
an “understanding” of the industry may be rewarded with good jobs in that
industry after they leave government service.
ENCOURAGING COMPETITION
The final way government deals with the hard choices posed by natural monopolies
is to encourage competition, even if it is imperfect. To understand this strategy,
International Perspective
THE DARKER SIDE OF PRIVATIZATION
In many countries around the world, where government used
to own a large share of industry, privatization has had a marked
impact on the economic landscape. Those favoring privatization
argued that it would not only improve efficiency but also
reduce corruption, by eliminating government enterprises as
a source of income and patronage.
But privatization itself has turned out to be a major source
of corruption; indeed, in many parts of the world it has come
to be called briberization. When state assets are sold at below
market prices, those who are lucky enough to get control of
them win a huge bonanza. (In Russia, instant billionaires were
created.) And to be sure, those who control the privatization
process get ample kickbacks.
The problem is that the sale of a large corporation involves
a host of technical details. To begin with, potential buyers have
to be certified—will they really come up with the cash they
promise? The rules for conducting the sales have routinely been
written and implemented in ways that serve the interests of
some at the expense of others. As a result, rather than being
those most capable of managing the corporation, the winners are
the most politically connected or are willing to bribe the most.
This in turn has meant that the promised benefits of privatization—increased
efficiency—often have not been realized. In
many countries in the former Soviet Union and Eastern Europe,
privatization has led more often to the stripping away of assets
than to the creation of more efficient firms.
296 ∂ CHAPTER 13 GOVERNMENT POLICIES TOWARD COMPETITION