The extent to which the government should be involved in the provision of goods and services generates a lot of debate. Most of that debate is unhelpful, since it involves small-government, market-fundamentalist types arguing against anti-market socialist types. It's all ideological, and there's a pretty good chance that neither of the sides in that argument is right.
This type of argument has come to the fore recently, with the government making noises about a partial privatisation of Kiwibank. Over in Australia, the premier of Queensland has created a bit of a storm by suggesting that the government might open some petrol stations. As this article in The Conversation by Graeme Hodge (Monash University) reports:
Queensland’s Labor government turned heads last week with a bold new election promise. If returned to power, it would set up 12 state-owned petrol stations and limit fuel price rises to just five cents a litre on any given day.
The proposal certainly tapped into a pain point for Queenslanders – Brisbane topped national petrol price rankings last year.
But it was quickly met with a predictable pile on from opposing political commentators, industry bodies and some economists, attracting labels like “risky” and “dumb and stupid”.
Mark McKenzie, chief executive of the Australasian Convenience and Petroleum Marketers Association, called it a “wildly bizarre intervention” in the retail fuel market.
So is the Queensland premier really out of his mind, trying to win votes less than three months out from an election? Or is there actually some merit to this proposal?
It's quite possible that the answer to both of those questions is yes. However, there is a useful question to be asked here. When should the government be involved in the provision of goods and services that the market could otherwise provide (or is already providing, as is the case for banking services or petrol stations)?
First, let's get something important out of the way. Just because the government provides something, that does not make it a public good. By definition, a public good is a good that is non-rival (one person consuming it doesn't reduce the amount that is available for everyone else) and non-excludable (if it is available to anyone, it is available to everyone). There are goods and services that the government provides that are public goods. The police force is one example. There are goods and services that the government provides that are not public goods. Kiwibank and petrol stations would be examples of those (both are excludable, since you can prevent someone from accessing them if they don't pay for them). There are public goods that the government doesn't provide. This blog is one example. So, just because the government provides something, that does not make it a public good. It has to be non-rival and non-excludable.
Coming back to the question at hand, when should the government provide goods and services itself? In my ECONS102 class, we discuss four principles of privatisation (or the reverse, public provision). These principles are adapted from three principles originally outlined in Diane Coyle's excellent book Sex, Drugs and Economics (no relation to this blog), which I discussed in this 2016 post. However, I have expanded on the principles over time (including adding in the third principle, the inspiration for which came from the substantially-less-excellent book The Price of Fish by Mainelli and Harris, which I reviewed here). The four principles are:
- The government can almost always raise large amounts of money more cheaply than the private sector
- The government is almost always worse at running things than the private sector
- Privatisation where there is a lack of competition will likely create a privately-owned monopoly
- Whenever the good has a large externality, is a public good or merit good, or has a long-term payoff likely to be overly discounted by quasi-rational individual decision-makers, the government is almost always going to have to be involved anyway
These principles seem to me to apply regardless of what you believe ideologically, and they are something that every privatisation (or public provision) decision must grapple with. Is this a good or service that requires a large, up-front investment in order to establish? If so, by Principle #1, it might be good to have the government involved because the cost of borrowing to pay for that up-front cost will be lower. But if the government is running it, by Principle #2, you can expect a worse service. Is there a lack of competition? By Principle #3, privatising would likely create a privately-owned monopoly, and associated problems. Is this one of the markets that requires close regulation or supervision, like healthcare, education, public transport, or financial services? By Principle #4, the government is going to have a large role in the industry anyway, so why shouldn't they be operating in that market?
Should the government be operating petrol stations though? The principles don't answer that question, but they do give you some things to think about. This is not a business that requires a large up-front investment to get started (Principle #1). Sure, it takes some capital to set up a petrol station. Perhaps it takes a lot of capital. But it certainly doesn't take so much capital that you need the government to fund it.
If the government is running some petrol stations, those petrol stations will likely offer a worse service (Principle #2). Why? Government-owned firms lack a profit motive. Privately-owned petrol stations have a strong incentive to give you good service. If they don't, you'll fill up somewhere else next time, and that means less profit for them. If they do a bad enough job, and lose enough customer, maybe they go out of business entirely. A government-owned petrol station doesn't have the same incentive. They can provide a bad service, and still not be shut down, because they exist mainly for political reasons, not profit.
We aren't talking about privatising here, so a privately owned monopoly is not being created. But, reversing Principle #3, this is creating government-owned competition. There isn't a monopoly here, but arguably there is a lack of competition. Adding another competitor, and especially one that is prepared to limit price increases, is going to increase competition. On the other hand, limiting price increases is going to create a government-owned firm that may well make losses, and then it becomes a question of how long taxpayers will be willing to subsidise their loss-making government-owned petrol stations.
In the retail petrol market, there isn't a strong case for the government to be involved anyway (Principle #4). This is not a market that requires strong regulation, in the way that financial services, healthcare, or education does.
Overall, how should we evaluate whether this is a good idea? Principles #1 and #4 don't indicate a need for the government to be involved. So, it really comes down to how any benefits from greater competition (Principle #3) weigh up against the worse service that the government-owned petrol stations would provide (Principle #2). I can't easily judge this, and reasonable people may well disagree.
Closer to home, the government will make a decision on what to do (or not do) with Kiwibank soon. I wish the government would consider these same principles in its decision. Sadly, so much government decision-making is based on fixed ideological positions, that it's unlikely that my wish will be granted.
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