NPR has a great ongoing series exploring how privatization can have extraordinary externalities, namely the role of private prisons in the drafting of Arizona's immigration law:
Thirty of the 36 co-sponsors received donations over the next six months, from prison lobbyists or prison companies — Corrections Corporation of America, Management and Training Corporation and The Geo Group.
By April, the bill was on Gov. Jan Brewer's desk.
Brewer has her own connections to private prison companies. State lobbying records show two of her top advisers — her spokesman Paul Senseman and her campaign manager Chuck Coughlin — are former lobbyists for private prison companies. Brewer signed the bill — with the name of the legislation Pearce, the Corrections Corporation of America and the others in the Hyatt conference room came up with — in four days.
Brewer and her spokesman did not respond to requests for comment.
This is an excellent example of why economics is both an extraordinary tool for analysis but also one that is easily abused. The primary argument for privatization almost always comes down to one of efficiency: the public sector is slow, it's bloated, taxpayers pay $1000 for toilet seat installation, etc. That is not a concern to be belittled, and removing all constraints and checks from public sector workers is clearly a horrible idea.
But the flip side is that there are deep political economy concerns any time you privatize the provision of a public good. The incentives society as a whole faces (i.e., let's *not* incarcerate everyone all the time) are the exact opposite of what a for-profit prison faces (from the article: "They talk [about] how positive this was going to be for the community," Nichols said, "the amount of money that we would realize from each prisoner on a daily rate."). Since politicians respond to incentives, too, and for-profit companies have money to spend on campaign donations, political ads, etc., an already difficult problem is made much more complex (and, I'd argue, welfare decreasing) by following a simple welfare-enhancing efficiency argument.
Now, the flip side of the flip side (since I doubt most people reading a "sustainable development" blog are hungering for privatization) is that the same argument applies for all organized interest groups, not just private ones. This is very similar to the classic argument against unions, for example: New York's widely disliked (even by a lot of teachers) United Federation of Teachers is able to exert a huge amount of political pressure to support policies that are almost certainly harmful to educational outcomes, e.g., making firing bad teachers extraordinarily hard. The problem is the same: once an interest group comes into existence it will do its best to influence policy in its favor.
So what do we do? Legitimately, I think the two solutions are the obvious, difficult ones: transparency in campaign finance and mobilization of counter-interest groups. The first is hard for all of the obvious reasons (including most organized interest groups being against it) and the second is hard because often the counter-interest faces not just asymmetric funding (there's no private interest in keeping people *not* in prisons) but also a fundamental public goods problem: damages tend to be dispersed and costs of abatement concentrated, so anyone joining the counter-interest is either going to be doing it altruistically (e.g., a non-profit), because they were one of the unlucky few who got hit with particularly concentrated damages (e.g., the family of someone unjustly imprisoned), or because they reap some metabenefit (e.g., the NPR reporters covering this story) .
Which is to say, surprise, it's a fairly intractable and complex problem. If there's a lesson to extract I think that it is, as it so often seems to be, to always think about how incentives align, especially before you make large, difficult-to-reverse decisions. In particular, I think it's important to remember that creating a monied interest group is one of the most difficult-to-reverse decisions there is.