Rules For Beneficial Privatization: Practical Implications Of Economic Analysis

In market economies, privatization of larger enterprises has been followed by regulation to prevent the firm from exercising market power and to enable competitors to enter the market and survive. Often, the regulators’ rules have been poorly designed, raising costs, indirectly impeding competition and removing incentives for innovation and productivity growth. Analysis of regulatory experience in the US and elsewhere enabled economists to devise rules that can serve the regulators’ goals more effectively -- rules being adopted in a number of countries. This paper explains the nature of the regulatory issues and the associated problems. It also describes the economists’ proposed regulatory rules, particularly the price cap approach to prevention of monopoly profits while preserving incentives for efficiency and innovation, and the parity pricing rule for access to bottleneck facilities, that is, to facilities owned by a single firm without which no competitor can operate successfully.