Macro Moves

Why is Privatization of Public Goods important?

Created on 30 Oct 2019

Wraps up in 5 Min

Read by 4.2k people

Updated on 14 Jan 2023

There are a lot of goods and services that an individual needs for survival. As Maslow says, 'Physical needs, Safety, and Security, Belongingness, Self-esteem and Self-Actualization" in that order are needed for one's wellbeing and realizing his true potential.

Physical needs refer to basics like clean air, water, health, and education, which are of utmost importance for the survival of a human. However, repeatedly, the debate has been about the role of government in providing these needs directly to its people. Should the government do it on its own or just play the part of the facilitator? This piece talks about the possible privatization of public goods.

Public Goods

A public good is non-excludable (meaning one cannot be denied its consumption) and non-rivalrous (used by one will not diminish its value to others). Defence and Police are the best examples. If one pays the tax and other does not, an army cannot choose to defend only the taxpayer. Therefore, you cannot exclude freeloaders. Also, if the taxpayer is saved, it does not mean the freeloader will not be saved. This means it is non-rivalrous.

A streetlight on the main road is an example. The light will be available to both the taxpayer and freeloader.

Education is another public good, not by virtue of economics but constitution. Of course, the lecture of a teacher is equally available to the students, so it is non-rivalrous. However, by 'right to education' the education cannot be denied to any child in the country irrespective he pays or not. This makes it non-excludable.

Government in Business

This discussion was relevant if this was 1950. This theory is a certified failure since the 1970s. India's lag from China is a story of its failure. The Indian government does a lot of business. It is in aviation (Air India), banking (PSBs), oil (Indian Oil Corp), steel (SAIL), transport (railways), and even soaps(Mysore Sandal Soap)! The developing countries developed when they create a market for goods and then let private companies take over.

The business of government is to provide defence, law & order, electrification, dams, regulations, and all those services no private player would provide. For everything else that a private player can provide, the government has no business in business. It just has to be a regulator. The more it allows private players in the industry, there will be competition among them; more competition will provide multiple options to citizens. Citizens would get quality goods at a lower price.

Fortunately, India has learnt its lessons and we are on the verge of privatizing the plethora of PSUs we have.

Privatizing the Public Good

Is it possible to privatize public goods? The air, the water, or the Police? No. They cannot be privatized, yet there are other public goods that are not actually public. The government has restrained these sectors in the name of public welfare but has abysmally failed in the last 75 years.

For example, the education system. Education in India is a public good by virtue of the laws. The Indian constitution does not allow the schools to function as a normal industry. In fact, the schools are not allowed to make profits from their functioning. It requires 71 licenses to open a school but just 2 to open a wine shop! Where is the incentive for someone to open the school?

Why is it needed?

While it is essential to provide education to each child, the purpose of education has certainly failed. The problem with the government schools is hidden to no one. Not just that, the outcomes of government schools are abysmal. They are spending sumptuous amounts over this system whose obituary was written on the day of its inception.

Where has this led us? Good private schools are numbered when compared to government schools. They charge exorbitant fees for their service. The taxpayers face the double whammy of paying the taxes for schools and paying fees of their children.

All this at the cost of what? Closing government schools due to absenteeism, children enrolling for the mid-day meals and then leaving post-lunch are just two issues. Maharashtra spends 954 crores every year only for teachers who have not been delegated to any school! It means these teachers are being paid for nothing.

Hospitals have similar problems. The government's Medical Council of India has not allowed a significant increase in medical colleges. This has led to severe shortfall of doctors and health workers in the system.

How will privatization solve this?

Say if the government allows schools to profit like any other industry. This profit is an incentive to open a school. Soon we would see a large number of schools coming up.

The competition among schools would force each of them to keep their fees as low as possible. Suppose there is a school today that charges Rs. 1 Lakh per year, and another school comes there with similar facilities but charges only Rs.50000, the former will be forced to bring down its fees if it has to stay in business.

Health and education, like public goods, are like footwear. Everyone needs them and wears them as per their affordability. The schools would open in villages as well, of course suiting to the purchasing capacity of the market.

What will happen to the poor?

What happened to LPG cylinders? When they were available at a subsidized price as a 'public good,' there was a shortage and black marketing. Then came direct-benefit-transfer (DBT). This allowed the customer to buy at market price and put a subsidy amount in their bank account.

It is true that 19% of India is still below the poverty line and cannot afford a paid education. They can be facilitated through education vouchers or Direct-benefit-transfer. These vouchers can be exchanged for fees. The government will reimburse this fee.

The government is already doing this for 25% underprivileged kids (per school) under the Right to Education Act. The government must set regulations for schools. For instance, all teachers must have a B.Ed. degree; their details should be on the website, etc. The government must let the market function freely.

Similarly, Ayushman Bharat scheme would be a success if it allows the poor to choose the hospital they want. However, the health sector needs more professionals.

Closing Word

The romantic relationship with public goods like health and education must end. The emotion of holiness associated with these should be kept aside. The ladders from poverty to affluence are these public goods. This ladder is broken. What matters is that it should be available and sound rather than who provides it. The cost of it will be minimum in a free market. Those who cannot afford it can be provided monetary help like DBT or vouchers but without distorting the market. This can all change in a period of time.

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Vivek Tiwari

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Vivek Tiwari is a Software Engineer and a Data Scientist who hopelessly fell for Economics. His plans to move to Management might now save mankind from his IITJEE selection story.

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