The long-term effects of government failure

In a good blog post on FirstPost, R Vaidyanathan writes that one of the possible reforms for the new government to take up would be to invest massively in electricity and water supply infrastructure and ensure 24 x 7 supply of these two commodities throughout the county. In his post, he explains that a move such as this will help Indian households (especially “middle class” households) and industry save a sum total of Rs. 1 lakh crore per year. While his numbers are not particularly convincing, his point is well taken – that irregular supply of basic infrastructure leads to additional private investment in such infrastructure which is an unnecessary cost. Electricity and water supply have “natural monopolies” and it helps to have a single supplier (in a local area at least) supply these goods rather than people making their own private supply arrangements.

Setting aside the problem of creating capacity for 24 x 7 universal power and water supply (priced at marginal cost, I assume), the problem reform such as this is likely to face is that there will be entrenched players who have a vested interest in such reform not taking place. And the  reason such vested interests exist is because of past government failure.

In the absence of reliable public supply of infrastructure, private companies have come up to fill in the gaps. You have, for example, companies that manufacture invertors (to store and supply electricity in times of power failure), those that manufacture diesel generators, companies that supply water in tankers when there is none in the pipes (or worse, pipes don’t exist) and so  forth. None of these companies will like the reform that Vaidya has proposed – for reliable supply of water/power will put them out of business! Hence they can be expected to lobby against such reform! Notice that the primary reason such companies exist is because of past government failures. Had past governments intervened and invested at the right time to provide reliable power and water supply, there would have been no gap in the market for such companies to fill.

Power and water supply are only two of several examples. Take for example the basic public good of law and order (strictly speaking power and water supply are not public goods). The lack of effective law and order enforcement by the state governments has led to a mushrooming of private security agencies. Every apartment building, every office building, malls and hotels are all now patrolled by a heavy posse of private security guards. In the presence of effective policing, these agencies have no business being in business (except perhaps in very limited cases)!

The point I’m getting at is that government failure at a particular point in time can lead to continued government failure. When we encounter policy paralysis, it is not just a temporary slowdown in decision-making and policy-making we face – it can lead to significant long-term consequences.

Here is an old related blog-post on my personal blog on private supply of what should be provisioned by the government.

 

2 thoughts on “The long-term effects of government failure”

  1. In US the traditional power companies – like Southern California Edison – are undergoing a change in their business model. They are becoming more of a power distribution company, than power generating company. Many local businesses and individual households are installing their own solar PV supply, and in some business cases like my institution Caltech, also doing generation using fuel cells. Legislation has helped because SCE is required to have 25% of its supply from renewable sources by 2025. And it is not doing too much capex in these areas.
    Our unincorporated town of Altadena, California has its own water supply company, that is different than the neighbor Pasadena’s water supply. That itself is different from the metropolitan Los Angeles Department of Water and Power.
    In both power and water, having more local control over these resources is probably not a bad business model. It will remove some of the centralized corruption because the local boards will be more responsive and timely to local needs – they themselves will most likely suffer the consequences of poor service.

    India should consider delocalizing these “monopolies”. In that scenario, the company that makes the inverter, or the solar PV panel, will probably have more efficient markets nationally to sell to. Yes, some shifts will take place – the tanker that is now in business may have to find some other business need to serve. But this is what is needed for India.

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