Pakistan Institute of Development Economics



Why Regulate a Privatised Firm?

Author: A.R. Kemal

The paper examines changes in the levels of efficiency as a result of privatisation in Pakistan. By comparing the growth rates of the privatised industries in pre- and post- Privatisation period, changes in relative prices and the rate of return on equity, it concludes that producers may have indulged in monopolistic exploitation. The paper argues that even if the private firms have lower cost curves as compared to public sector at all the levels of output, at the equilibrium, public-sector firms may have lower cost. Accordingly, the regulation of the private monopoly, especially in the non-traded sector, is absolutely necessary. However, if regulation implies uncertainty and less flexibility to private sector firms, even compared with public sector enterprises, then regulated privatesector firms would be counter-productive. It suggests that the perfect contest-ability model which allows the firm to make sufficient profits and leave them free to take the decisions will be a better alternative. The price caps in line with changes in productivity and the general inflation rates may be a more efficient intervention.

A.R. Kemal