Privatization and the Market Role of Local Government

Publication Date: December 2001

Publisher: Economic Policy Institute

Author(s): Amir Hefetz; Mildred Warner

Research Area: Economics; Government

Type: Brief

Abstract:

In the early 1990s, Chautauqua County, N.Y. was pulling out of an economic slump. Keen to maintain services while reducing taxes and building government reserves, the county executive aggressively restructured government services using a mix of strategies -- sometimes privatizing services, but at other times bringing previously privatized work back in house. The county also cooperated with other local governments to achieve economies of scale, and introduced performance-based incentives to promote efficiency and investment in new technologies within county departments.

By 1997 the county funds were up, the tax rate had fallen, and services had expanded. In the end, the county's officials decided that, barring a few exceptions, neither the private nor public sector offered an inherent advantage, so they found a middle path between those who stress the advantages of privatization and those who advocate for the direct provision of services by government.

Successful local governments such as Chautauqua County's recognize privatization as one of a number of available tools for restructuring their operations. Other such tools include inter-municipal cooperation, performance-based incentives, and cooperative labor-management relations. All of these options can help governments enhance economic and social efficiency. While privatization represents the most widely pursued alternative to public service delivery, local governments use a wide set of restructuring strategies in order to address a variety of market conditions and a broad range of social concerns.