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Chapter Summary

Sclar, Chapter One, The Urge to PrivatizeChapter1 of You Dont Always Get What You Pay For: The Economics of Privatization. Ithaca, NY: Cornell University Press.

In his introductory chapter, Elliot D. Sclar suggests that we strike a balance between privatization, primarily the use of contracts for services, and internal reform of government entities. His first chapter examines the strengths and weaknesses of privatization through a systematic analysis and explanation of economic theory as well as the specific problems with contractual competition.

First, Sclar tracks the historical change in the prevailing view of the role of government. At the turn of the century, people viewed government as the key to solving the great social problems created by capitalism. After the collapse of many socialist governments, capitalism became deeply entrenched as the solution to the social problems created by massive, sluggish governments.

Sclar then explains the standard market model and its underlying assumptions. In this model, the cost of anything is determined by the expense of its production. Producers work to reduce costs in order to sell at the lowest price so that consumers will purchase their product. Sclar points out the many ludicrous assumptions required to make this model work, emphasizing the models inability to account for inequality. He then explains that the contract market doesnt fit this model because market barriers are too high.

Economic power tends to concentrate with certain sellers in what Sclar describes as mountain peaks among the more plateau-like competitive markets. Most sellers dont like these competitive markets because they are not sustainable over the long term. He uses the analogy of the good guy against all the bad guys to illustrate the level plateau. Through illustrations and examples such as these Sclar disproves the assumption that markets are a level playing field, and therefore, calls for a more realistic view of the market to better comprehend the potential benefits and drawbacks of privatization.

Several factors limit contractual competition. Most contracts are made for multi-year periods, thus eliminating competition. Many services, such as water and sewer treatment, are inherently monopolistic. Furthermore, contractual relationships are more efficient when sustained over long periods of time.

Finally, outsourcing can become a problem for governments. The contractors do not have ownership of the particular service they provide. Sclar uses the example of a jet crash due to improperly handled hazardous material. The contractor wanted to get rid of his/her responsibility of the material and return it to its owner. Governments must use the spot market to buy specialized services. The very fact that the government has entered the market will affect the price of those services, especially over a long term.