Advantages & Disadvantages of Privatization

by Lindsay Kramer - Updated July 16, 2018
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Privatization is the phenomenon of governments contracting privately owned, for-profit companies to provide services that were previously provided by the governments themselves. It can happen at the local, county, state and even federal level. There are numerous advantages of privatization as well as many disadvantages of privatization, and they're all related to one thing: profit.

Tips

  • When private entities take over the operation and management of public services, that's privatization.

Understand the Advantages of Privatization

In the business world, competition is a good thing. Competition drives entrepreneurs and service providers to innovate the products and services they offer and work to make their offerings more appealing to consumers than their competitors'. When the government is the sole provider of a service, there is no impetus to consistently innovate or serve the consumer – resident under the government's jurisdiction – better than he was being served before.

Competition pushes service providers to lower their operating costs, which can mean the savings are passed onto consumers. Greater efficiency cuts down operating costs, which in turn benefits consumers by serving them promptly.

When a public service is privatized, it can become immune to political influence. This is because instead of having companies and special interest groups vie for favor from the government office in charge of the service by making strategic campaign contributions and providing vocal support, the private provider is focused on profit. That doesn't mean there's no chance for corruption, though. In some ways, privately operated public services have a greater corruption risk than services provided by the government.

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By providing public services more efficiently and at a lower cost by privatizing them, governments can lower the taxes they impose on residents. In some cases, privatizing a public service like a prison can create job opportunities for residents in an area, increasing the quality of life for them and strengthening the local economy.

Recognize the Disadvantages of Privatization

Though there are many advantages of privatization, there are also disadvantages of privatization. One important disadvantage to recognize is the opportunities for bribery and corruption that come with privatization. Typically, private companies are less transparent than government offices, and this reduced transparency paired with a drive for profit can be a breeding ground for corruption.

There is also the issue of inflexibility that can come with privatization. Typically, governments sign lengthy contracts with private service providers. These contracts can span for decades, locking residents into one service provider for lifetimes. Although a private company might make itself attractive to win a contract, its service can take a quality nosedive once it's in place and its consumers are complacent.

Although privatization is usually promoted on the basis that it will reduce consumers' costs, it can also drive costs up. According to nonprofit consumer advocacy group Food & Water Watch, a proposed private water service for Milwaukee would cost residents 59 percent more than they were paying for public water service.

Privatization Pros and Cons at a Glance

In short, privatization pros and cons are:

Pros

  • Greater efficiency.
  • Lower taxes for residents.
  • Reduced opportunities for political influence to drive services.
  • Better services through competition.

Cons

  • A greater opportunity for fraud and corruption to occur. 
  • Higher costs for consumers.
  • Inflexibility due to long-term contracts.
  • Profit, rather than residents' needs, as a primary motivator.

As you can see, many privatization pros and cons are effects of the same cause. Privatization is driven by private entities' need for profits and governments' need to operate efficiently. All of privatization's advantages and disadvantages are, directly or indirectly, the result of this drive for profit.

About the Author

Lindsay Kramer has been a full-time writer since 2014. As a small business owner, one of her favorite parts about writing about business is helping other small business owners and aspiring entrepreneurs become more fluent in business topics, equipping them for greater success.

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