Practical Considerations: When Does Privatization Make Sense?

Practically speaking, privatization makes sense for the public when certain conditions are met.2

•  First, privatization works best when private companies have a proven comparative advantage over government agencies in providing a particular good or service. For instance, at least before recycling programs were created, a variety of exhaustive studies concluded that because smaller municipalities lack economies of scale, those that used competitive contracting for household garbage collection had lower costs than comparable municipalities that used public agencies for collection.3

•  Second, the services that are privatized must be well defined, with clear criteria for the evaluation of success or failure. It is less problematic, for example, to contract for private delivery of a ton of cement or for office windows to be washed each Friday than it would be to contract out "justice" from the courts.

•  Third, privatization only succeeds when private contractors' performance is disciplined by ongoing competition. There must be multiple contractors capable of submitting bids, and contracts must be for a short enough period to allow for un satisfactory performers to be readily replaced.4

•  Finally, privatization works best when the government officials making the decision to privatize can be held accountable for the results of a deal.