MentalPolyphonics
You ain't gotta be in jail to be doin' time.
February 12, 2010 at 12:41 am
Tagged: bc, Economics, homework
There are some reasons why BC should consider privatizing ICBC and opening the primary insurance market to competition:
ICBC has a legislated monopoly on a low-elasticity good: primary insurance is legally required and few consumers are willing to go without a car. If ICBC were a private sector company, they would increase the price of primary insurance to maximize profits. Since ICBC does not have a mandate to profit, they do not maximize the price but they also do not minimize it. A primary insurance market with competition should result in lower prices.
Since ICBC is not collecting a profit from the non-minimal prices, where else is the money going? It is being passed along to their suppliers. ICBC’s bigger supplier, by far, is their employees. Employees in monopolies engage in “rent seeking”: earning a higher wage by virtue of their position in the market. A market with competition of employers should result in lower wages (the savings passed on to consumers).
ICBC’s employees also have no incentives to work smarter: there’s no competition attacking their market share and, as public sector employees, their pay is not linked to company performance. Competition in a market increases productivity. Existing firms invest and innovate to increase their competitiveness and new firms grab a share of the market through innovation. Higher productivity results in lower cost.
As the sole supplier, ICBC has less incentive and opportunity to innovate. For example, many economists advocate pay-as-you-drive insurance rates. But ICBC has no reason to implement changes without political will. A competitive market would produce more innovative services.
Recent scandals at ICBC demonstrate a sense of entitlement. Employees of a monopolist feel that they “own” the market. Being a Crown corporation under control of a Minister opens the door to political meddling. Consumers would receive higher quality from independent organizations.
Jack
I find situations with mandated insurance where that insurance is supplied by private vendors to be morally questionable. I don’t want privatized health insurance, for example.
ICBC spends money on preventing accidents, which no private insurer does. And I’m not really super concerned that driving a car is retarded-expensive and provides a lot of well-paying jobs.
Also: can you provide an example of deregulation driving prices down?
Homework: ICBC Should Stay Public « MentalPolyphonics
on February 16, 2010 at 8:19 am
[...] ICBC were a private-sector monopolist, we would expect to see high prices and high profits. But ICBC is a public entity with no profit mandate and we observe the lowest prices for primary [...]