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While privatization can mean different things to different people, it generally involves contracting with private sector firms to produce and/or provide goods and services that previously were provided by the public sector. It usually takes one of four forms including:

  1. Sale of a government enterprise to a private organization;
  2. Contracting with a private organization to provide a service;
  3. Charging user fees to recover the cost of a publicly provided service; and
  4. Providing vouchers to low-income persons so they can afford to purchase goods or services from private providers.

Public Works - Privatization's Success Story

One of the virtues of privatization of public works is that it allows for competition by opening the door for entrepreneurs. There is ample evidence that just as a variety of grocery stores or an array of auto dealers available to consumer leads to competition in prices and quality, a variety of public service providers can offer the same to the public. Consequently, it is better to not contract with just one provider or to have period re-bidding for the municipal contract to ensure that the competition remains strong. There is not evidence that having a single contractor is the best option for the provision of services.

The use of public payment for private services defeats a major objection to privatization: fairness. Under privatization the poor may not be able to pay for the service if it is provided by private firms that would charge the full price of the service. The voucher system meets this objection. In addition it recognizes that often "free" public services are used only because they are free. Certainly choice is maximized when consumers can select their own service provider.

Given that state and local taxes are generally regressive, bearing more heavily upon low-income than high-income individuals, it may be more equitable to establish users' fees and supply vouchers to those with low incomes than to provide the service on a "free" or reduced cost basis to all individuals regardless of their ability to pay. If the government feels that a service or good is so essential or desirable that people should not be excluded from consuming because they lack funds, then the use of vouchers is an excellent alternative.

Government can, and often is, inefficient. Governments are often only able to provide services to their citizens at enormous costs and waste, and often the price of maintaining such services are higher taxes. Therefore, governments, especially local governments are forced to either raise taxes or cut services, and either move is unwanted by the public. It has therefore become an increasingly popular option to privatize such services. Privatization encompasses a wide range of approaches that insert the private sector into the delivery of government services. One means of doing this is to for local governments to discontinue services that can be purchased from the private sector, most commonly through contracts between the local government and a private vendor. According to the research by Paper Masters, examples of commonly privatized services include:

  • Solid waste collection (i.e. garbage collection)
  • Recycling
  • Building maintenance
  • Building inspection
  • Street repairs

Two areas in which privatization has become an important issue are water and wastewater facilities and ambulance services. According to Johnson and Moore (2001), cities across the nation are facing problems of "unfunded mandates, crumbling infrastructures, and tight finances." Johnson and Moore specifically cite three main reasons why local governments are turning to the private sector for their water/wastewater services:

  1. Decaying infrastructures. Many of the nation's water and wastewater systems include water and sewer infrastructures that date back to the early 1900s. More recent systems were built with federal funds during the 1970s, and now need upgrading or replacing. The EPA has estimated that the nation's 76,000 drinking water systems alone will require $150 billion in investments over the next 20 years, with wastewater systems requiring a similar level of investment.
  2. Mandates. The federal government has reduced its contributions to local water systems over the past 30 years, while at the same time imposing stricter water quality and effluent standards under the Clean Water Act and Safe Drinking Water Act. These unfunded mandates are forcing municipal systems to meet federal regulations through local sources of revenues or state revolving loan funds.
  3. Lack of Political Will. It is often difficult for local officials to commit to making the necessary investments in community water systems, since water pipes and sewer mains are not visible and therefore not perceived as immediately critical for adequate funding. It is easier for elected officials to ignore them in favor of expenditures for more visible services, such as police and fire. In other words, out of sight, out of mind.

When the city of Indianapolis privatized their water system in 1994, the city saved $78 million dollars in five years, exceeding the estimated savings of $65 million. The city of Indianapolis was so pleased with the performance of its contractor, White River Environmental Partnership (WREP), that in 1997, rather than renew a five-year contract, they signed a ten-year contract. The total savings from 1994 to 2007 is estimated to be $250 million.

Privatization of ambulance services has proven to be a bit more controversial. According to Johnson, "ambulance wars" broke out across the country, where separate private and public crews often showed up at the same accident sites. The reason for this was largely due to the expansion of fire departments into other areas. According to Johnson, the number of home and building fires in the U.S. plunged 40 percent over the past two decades, down to 1.8 million annually, but the number of paid firefighters increased 20 percent to 275,000. Fire departments were forced to expand their range of services in order to survive, and providing other emergency services. As it stands, in some cities, (Los Angeles, Chicago, and Miami, for example), 90 percent of the emergency calls to firehouses are in response to auto accidents or other medical emergencies.

However, many independent surveys maintain that private EMS provides better services. Research from Paper Masters cites the following statistics: 70% of private agencies have defibrillation devices (used for heart attacks), compared to 40% of fire departments. Also, more private agencies (48 percent) are using advanced technology, such as the automotive vehicle locater, than fire departments (20 percent).

All of the data in these two examples appears to indicate that many government services can be provided cheaper, better, and more efficiently by the private sector. Private companies are motivated by one thing: profit. In the case of providing government services, if the vendor does not do what it says it would (better and cheaper), then the vendor will lose the government contract and its profit potential. We have all heard stories of how government employees fail to perform the duties of their jobs because they cannot be fired. An independent contractor faces the possibility of being fired by the municipality if it fails to perform its duties, and has greater control over its workforce. Privatization is a trend that will continue in America as long as governments see that better services are provided for less tax dollars.

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Privatization Research Papers

Privatization research papers present information on the pros and cons of privatization. Also investigated are examples of industries that have gone to privatization and how well it worked to privatize a government service.

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