Good things & bad things: competition and privatization

When I talk to students about anti-competitive behavior, I like to start with a stark illustration. There are lots of things firms might do in order to earn profit, and these things might be good or bad, broadly speaking. Profiting by producing a higher-quality product, or by producing at a lower cost than competitors: good things. Sending Fat Tony to threaten your competitors with violent death if they do not bow out of the industry: bad thing. The good things are profitable to firms because of the benefit to consumers that is generated, whereas the bad things benefit firms at the expense of everyone else. The purpose of competition policy is to preserve firms' incentives to do the good things and preclude them from doing the bad things. There are lots of complications, of course, making it difficult to sort out whether a particular strategy (e.g. a merger between two firms) is actually a good or a bad thing. But the basic idea is that when firms are doing their best to earn profit within the constraints of well-designed laws, their activities enhance consumer welfare.

The same question arises in the context of privatization. If some government-run entity, like a prison, is put into private hands, there is then someone who stands to profit if he does a good job of running the now-private entity. The hope is that a firm running a prison for profit will do good things for the sake of profits, like reducing costs, insofar as this can be done while still fulfilling the purpose of having a prison. I would guess that prisons are a target for privatization for two reasons: in addition to the general phenomenon of government agencies doing things less efficiently than private firms, incarcerating convicts is probably a relatively costly activity. Thus there would be a lot of benefit to be had by creating strong incentives for running prisons better.

Do we really need to regulate that?

Why is it illegal to smoke on domestic flights in the U.S.? Whatever benefit there is of prohibiting smoking on a flight accrues to those who are actually on the plane. If this benefit is large enough, then it is in the interest of the airline itself to prohibit smoking, because the benefit to passengers translates directly into greater willingness to pay for airfare and greater profits for the airline. Is it somehow easier to enforce a smoking ban if the force of law is behind it? Did the government pass the law to insulate airlines from the ire of those passengers who would prefer to smoke in flight? Maybe, but I would also note that some airlines had their own smoking ban before the law took effect in 1998. Is the purpose of the law to level the playing field, because there is some negative consequence of allowing airlines to compete through their policies regarding smoking? Again, maybe. I wouldn't suggest that anyone should be able to smoke on airplanes, either as an economist or as an air traveler; but it is clearly incorrect to assume that the only way to achieve this outcome is by passing a law. This seems to be a fairly common belief: that if the government doesn't make something happen, it won't happen.