Lesson 9 - Public Enterprises
 

This lesson lists the public ownership types and reasons for government to establish ownership over markets.  Numerous examples are given to explain the different types and reasons.

 

Public Ownership Types

Government Ownership Examples

  • Romans had public ownership
    • water industry
    • military arms production
  • U.S. has public ownership
    • Electricity (20%, 2000+ firms)
    • Natural Gas
    • Water (80%)
    • Local transportation: bus, subway, commuter rail.
    • Roads
    • Airports
  • United Kingdom used large scale nationalizations
    • Telecommunications (1912)
    • Bank of England (1946)
    • Rail road (1948)
    • Electricity markets (1948) 

Public Ownership Types

1. Co-operatives

  • Government forms an association with a group in society
  • Example - cooperatives for U.S. agricultural producers
    • Government supports cooperative and cooperative helps with
      • Marketing
      • Buys from farmers and re-sells to food industry
        • Cooperative has market power
          • Single seller
      • Loans and credit
        • Farmers need loans to purchase supplies and equipment
  • Government does not have to control or finance a cooperative.  Some cooperatives formed to serve and benefit their members.

2. Central government ownership (large scale)

  • Government owns the whole market (or industry)
  • Example 1
    • Some governments nationalize their energy companies
    • Refer to end of lesson for examples
  • Example 2
    • Soviet Union - Collective farms
    • Government owned everything; workers probably could be viewed as "slaves to the state"

3. Municipal government ownership (small scale)

  • Municipal is city and county governments
    • Usually water
    • Sometimes electricity and natural gas

4. Government departments

  • Example 1
    • U.S. Department of Education
    • U.S. Department of Defense
      • Military
  • Example 2
    • Many countries call their departments ministries.

5. Quasi-government agency

  • Example – U.S. central bank
    • Federal Reserve System
    • Setup like a corporation
      • U.S. national banks are shareholders
      • Shareholders should control corporation, but they do not in this case
    • Controlled by Board of Governors
      • U.S. president appoints board members including chairman and vice-chairman
        • Ben Bernanke, Chairman

6. Public corporation

  • Government setups company as a corporation
    • Corporation issues stocks
    • Government receives dividends and assesses taxes
    • Government usually is majority shareholder
  • Government elects board of directors
    • The board elects the president
  • Example
    • PEMEX – Mexico’s Petroleum company

U.S. city governments

  • Similar to a corporate structure
  • Charter
    • Document that establishes city
    • Defines structure of city
    • What the city government can and cannot do
    • Website has many city charters and laws
      • www.municode.com
  • City government
    • City Council – equivalent to board of directors
    • Mayor – equivalent to corporate president
    • City residents – equivalent to shareholders
      • Residents also elect mayor and city council
  • Reason
    • Open form of government
    • City council meetings open to public
    • City is supposed to be responsive to its citizens.

Reasons for Government Ownership

1. Ensure safety or security
  • National security
    • Many countries control their energy industries.
    • An energy disruption could shut down a country
  • Public safety
    • City and county governments
      • Own and operate police and fire departments
      • Operate ambulance service

2. Re-distributive goals

  • Public ownership can be used to redistribute consumer and producer surplus
    • Transfer surplus between markets
  • Example 1 - water prices
    • Water market price could be high
    • Requires lots of infrastructure
    • City gov. uses tax revenue from property taxes to subsidize water department
      • Water department charges lower prices for water
  • Example 2 - subsidizing businesses
  • Local government uses tax credits, and other incentives to foster new businesses

3. Prevent monopolization

  • Government takes over market
  • Prevent the market power from a monopoly
    • Government becomes the monopoly

4. Government controls distribution

  • Government charges high prices and ensures taxes are paid
  • Example 1 - State of Utah owns liquor stores
    • Government charges high prices
    • Collects taxes
  • Example 2 - Government is a large purchaser
    • Force companies to lower prices
    • Prescription medicine, vaccines, etc.

5. Public firms less likely to use price discrimination

  • Politically popular to have simple rate structures
  • Firms could use price discrimination to capture consumer surplus
    • Thus, increasing revenues and profits
  • For example - College uses price discrimination to increase revenue
    • Left diagram - college charges $10,000 per year and has q* students
      • Revenue is light purple box
    • Right diagram -price discrimination
      • College charges $20,000 per year
      • Rich students pay full price and number of students is q1
        • Revenue is green rectangle
      • Middle-class students pay $15,000, and number of students is q2 - q1
        • These students receive $5,000 scholarship
        • Revenue is light blue rectangle
      • Poor students pay $10,000, and number of students is q* - q2
        • Poor students receive $10,000 scholarship
        • Revenue is light red rectangle
  • The key to price discrimination is to prevent consumers who pay lower price from selling to consumers who are willing to pay higher price.
College
Price, Tuition Price, Tuition
Quantity, Students Quantity, Students

6. Government captures substantial market profits

  • Natural resources like minerals and energy generate substantial profits
  • Large source of tax revenue
  • Use revenue for social programs
    • Hugo Chavez, President of Venezuela

7. Macroeconomic stabilization

  • Government could slow down inflation
    • Government controls salaries and inflation of wages

8. Developing Countries

  • Reasons for government ownership
  • Regulatory agencies are weak
    • Limited funding, few inspectors, etc.
    • Private capital markets are not developed
    • Privatization increases chances of corruption

9. Government has political control

  • Corporations are large organizations
  • Some governments want corporations under their control

 

Government can give many other reasons to control industries or a market;  however, I removed them because they tend not to be true. 

For example, government can claim it can lower production costs, offer better service, or increase investment.  Maybe in the beginning, but usually this is not true.

Example 1 - OPEC

  • Organization of the Petroleum Exporting Countries (OPEC)
  • 5 member countries nationalized their petroleum industries in 1960
  • Set production quotas on petroleum
    • Lowering petroleum production leads to higher market price
  • Current members are
    • Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela

Example 2 - PEMEX

  • Mexico’s Petroleum Company
  • Has monopoly over petroleum and natural gas, including retail like gas stations.
  • 2005
    • Paid $52.8 billion in taxes and duties
    • Earned a $6.9 billion loss

Example 3 - GAZPROM

  • Russian government owns 50.002% of shares
  • GAZPROM controls
    • 100% ownership in 61 companies
    • Majority shareholder in 41 companies
    • Minority shareholder in 69 companies
  • Kremlin has strong influence over many companies

Example 4 - State Energy Companies

State Company Market
China National Chemical Import and Export Corporation (Sinochem) Imports and exports petroleum for China
China National Offshore Oil and Gas Corporation (CNOOC) Handles China’s offshore petroleum and natural gas resources
China National Petrochemical Corporation (Sinopec) Refines petroleum into products for China
Chinese National Petroleum Corporation (CNPC) Handles everything else for China that is not covered under the Sinochem, CNOOC, and Sinopec
Ecopetrol Columbia’s petroleum company
Gazprom Russia’s natural gas company
PEMEX Mexico’s oil and natural gas company
Petrobras Brazil’s petroleum company
Rosneft A Russian state owned petroleum company
Statoil Norway’s oil company
Transneft Russia’s pipeline monopoly

References

Microsoft Encarta 98 Encyclopedia. 1998. "Cooperatives." Microsoft Corporation 

Gazprom. Year unknown. List of Major Companies with Gazprom Shareholding. Available at http://www.gazprom.com/eng/articles/article8526.shtml (8/7/06).

_______. 2005. Gazprom in Questions and Answers. Available at http://eng.gazpromquestions.ru/page4.shtml (access date: 8/7/06).

Office of Energy Markets and End Use. October 1996. Privatization and the Globalization of Energy Markets. Washington, DC: U.S. Department of Energy, Energy Information Administration, Report DOE/EIA-609(96).

OPEC. 2006. The Organization of the Petroleum Exporting Countries (OPEC) Brief History. Available at http://www.opec.org/aboutus/history/history.htm (access date: 8/6/06).

Pemex. 2006. 2005 Annual Report. Mexico, DF: Direccion Corporativa de Finanzas. Available at http://www.pemex.com/index.cfm? action=content&sectionID=11&catID=149&subcatID=2711 (access date: 8/6/2006).