Infrastructure privatization in a neoclassical economy: macroeconomic impact and welfare computation

Abstract

In this paper a competi tive general equilibrium model is used to investigate the welfare and long run allocation impacts of privatization. There are two types of capital in this model economy, one private and the other initially public ('infrastructure'), and a positive extemality due to the latter is assumed. A benevolent governrnent can improve upon decentralized allocation intemalizing the extemality, but it introduces distortions in the economy through the finance of its investments. It is shown that even making the best case for public action - maximization of individuais' welfare, no operation inefficiency and free supply to society of infrastructure services - privatization is welfare improving for a large set of economies. Hence, arguments against privatization based solely on under-investment are incorrect, as this maybe the optimal action when the financing of public investment are considered. When operation inefficiency is introduced in the public sector, gains from privatization are much higher and positive for most reasonable combinations of parameters.