Essays in Honor of Dick Netzer
Studies in Fiscal Federalism and State–local Finance series
Edited by Amy Ellen Schwartz
Chapter 6: Public ownership in the American city
Edward L. Glaeser American local governments own and manage a wide portfolio of enterprises, including gas and electricity companies, water systems, subways, bus systems and schools1. Existing theories of public ownership, including the presence of natural monopolies, can explain much of the observed municipal ownership. However, the history of America’s cities suggests that support for public ownership came from corruption then associated with private ownership of utilities and public transportation. Private ﬁrms that either buy or sell to the government will have a strong incentive to bribe government oﬃcials to get lower input prices or higher output prices. Because municipal ownership dulls the incentives of the manager and decreases the ﬁrm’s available cash, public ﬁrms may lead to less corruption. Public ownership is also predicted to create ineﬃciency and excessively large government payrolls. Why do many American city governments directly provide public transportation, water and even power and light? Why do so many governments pave and clean their own streets instead of using subcontractors? Government ownership is almost invariably linked with waste and ineﬃciency, yet government provision in these areas remains common.2 One traditional argument is that natural monopolies create a case for government ownership, or at least signiﬁcant regulation (see, for example, Atkinson and Stiglitz, 1980), but it is not obvious that most public services are really natural monopolies. Subways may have some aspects of natural monopoly, but New York once had three competing subway lines. Certainly buses are not natural monopolies: New York once...
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