The Effects of Privatization of Public Utilities on Economic Efficiency and Government Revenue

The objective of this paper is to analyze the effects of privatization of public services on public economic efficiency and revenue. In this analysis a computable general equilibrium (CGE) model is employed. The results show that if public service privatization leads to deregulation of market prices in this sector then dead weight loss would be eliminated and consequently public efficiency and revenue would increase. If privatization leads to an increase in productivity of public services, the raise in public efficiency and revenue will be higher. These results would hold even in the presence of direct cash subsidy payments to households. However these results are sensitive to our assumptions in the model. In particular if we drop the usual neoclassical assumption of perfect factor mobility we would observe sector specific results in the oil and gas and public service sectors, in which public economic efficiency and revenue would be substantially lower. That is privatization of public series does not result in higher efficiency if the neoclassical assumptions are not held.