Tyler Cowen is an economist from George Washington University and a libertarian. Thus, you would expect his answer to this question would be ‘always’. In a recent Bloomberg article discussing whether to privatize government assets (e.g., USPS), he makes a more nuanced argument. First, for consumer goods, it is nearly always good to privatize. Cowen gives the example that Poland had publicly owned food production which could readily shift from government ownership to a competitive market. Nevertheless, he also makes that case that it may not always be good to privatize energy firms and water utilities, since it is difficult to create competition if houses only have a single connection to the power grid (or water pipes).

Another concern is that what makes private companies good at innovation may also make them good at rent seeking when the free market is not fully free.

Involving the private sector may give better incentives for cost reduction as well as innovation, since profit maximization is a strong impetus for those kinds of improvements. The efficiency of the private company, however, is also a source of problems. A private company may be efficient at lobbying the government for cronyist privileges. That may lead to higher prices, overly generous reimbursement for cost increases, tougher barriers to entry, or entrenched technologies that favor the incumbent.

In other words: If embedded in an imperfect system, corporate efficiency is not always a pure virtue.

He also gives some examples from the world of health care.

One recent study shows this privatization increased the costs of Medicaid significantly without providing offsetting benefits. The private companies have done a good job — for themselves — of extracting more revenue from the system. Yet Medicare Cost Advantage, which creates a private layer of service on top of Medicare, run by insurance companies, does offer significant benefits to those who opt for it.

Cowen is not a health care expert and his evaluation of Medicaid managed care and Medicare Advantage is rudimentary to say the least. However, whether Medicare Advantage is a good thing depends a lot on your point of view: proponents will argue that privatization improves efficiency, leads to more innovation and offers Medicare patients additional benefits; opponents will argue that privatization leads ‘cream skimming’, upcoding, increased cost and more utilization management. With patients, however, it has become increasingly popular over time.

I am someone who believes in the free market and when uncertainty exists my Bayesian prior is always that the private sector works best. However, Cowen’s conclusion is a profound one:

…talk of “privatization” per se is meaningless without elucidating which kind of privatization is under consideration. One class of privatizations, such as in Poland, is close to an unalloyed good, and economists are right to tout it. But in a large number of other cases, which are frequent in modern Western democracies, privatization works only when judiciously applied.