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potential applications of the general framework developed in the book. In addition, thebook integrates theoretical, computational and empirical analysis admirably and demon-strates the value of combining these different approaches. Finally, the book should bepraised for putting institutions on the agenda and for the attempt to formulate aframework for welfare analysis that is explicit about the fact that economic policy isultimately determined by a political process.
In conclusion, ADemocratic Choice and TaxationB is an impressive achievement andan enjoyable read. It deserves the attention of everyone interested in political economicsand public choice, as well as those mainly interested in tax theory.
References
Coughlin, P.J., Nitzan, S., 1981. Electoral outcomes with probabilistic voting and Nash social welfare maxima.Journal of Public Economics 15, 113–132.
Persson, T., Tabellini, G., 1999. The size and scope of government: Comparative politics with rationalpoliticians, 1998 Marshall Lecture. European Economic Review 43, 699–735.
Toke AidtFaculty of Economics and Politics,
Jesus College, UniÕersity of Cambridge,Sidgwick AÕenue,
Cambridge CB3 9DD, UKE-mail address: [email protected]
Ž .PII: S0176-2680 00 00024-0
Privatization, Restructuring, and Regulation of Network UtilitiesŽ .By David M. Newbery. Cambridge and London: The MIT Press, 1999. Pp., xviq466
In this very important book, Newbery concentrates on questions of efficiency ofprivatization, restructuring and regulation in the three network utilities, where there isgood evidence of the possibility of rigorous competition: telecoms, electricity and gas.He concentrates on Britain and United States, but examines a variety of other countriesas well.
Newbery argues that privatization is a necessary but not sufficient step to achievingthe benefits of competition. He shows that the wave of deregulation that started in 1978in the US exemplifies the fact that markets were better than regulators at reducing pricesand increasing efficiency. The information that was being assumed to be costlesslyavailable for directing utility policy was unfortunately incomplete. Thus, regulation isunavoidably inefficient.
The reasonable solution to regulatory failure involves choosing the right structure forthe utility, that is, one that will limit the need for necessarily inefficient regulation.Newbery’s rule for structural reform is: ACompetition where possible, regulation onlywhere unavoidableB, where AunavoidableB mainly refers to the natural monopoly core.He thereby separates this core from potentially competitive network services. In thissense, it is liberalization rather than privatization that is the key to improved perfor-
Book reÕiews 207
mance, and vertical deintegration appears to be a strong device for increasing competi-tive pressure.
The first chapter supplies a brief history of the evolution of governance structures forpublic utilities, which suggests that a number of factors influence whether the utility willfall into public ownership, or whether and how it will be regulated if it remains inprivate ownership.
The second chapter looks more closely at the conditions needed to sustain privateownership, describing when these might be lacking, so that public ownership is thedefault option, and then states what is needed to successfully privatize a publicly ownedutility.
ŽThe third chapter concludes that the quality of regulation which is stronglydependent on the credibility of the regulator’s commitments, which can be reinforced by
.the existence of constitutional limits on regulatory discretion is a key determinant ofthe utility’s performance, notwithstanding whether the utility is public or private.Compared to the quality of regulation, ownership seems relatively less important, thoughthere may be more chance of high-quality regulation under private than public owner-ship.
In the fourth chapter, Newbery argues that regulation is inevitably inefficient becauseof the problems of information and the regulator’s commitment, and more fundamen-tally, because of inefficient bargaining between interest groups over potential utilityrents.
In his fifth chapter, Newbery claims that the design of structural reforms has aconsiderable impact on both the costs and benefits of liberalization. The costs increasewith the amount of restructuring, while the benefits depend on the speed of itsintroduction and the effectiveness of competition.
In chapters 6, 7 and 8, Newbery reviews and examines empirical cases of deregula-Žtion, liberalization and privatization in three network industries electricity, telecoms,
.and gas . His central message is that it is liberalization, rather than privatization, that isthe key to improved performance, and by liberalization he means vertical and alsohorizontal deintegration, which increases competitive pressure. Electricity, telecoms andgas are alike in that they were all thought to be vertically integrated by definition,because of their natural monopoly properties. All of them are being liberalized andrestructured in various ways in the UK and in the US and in other countries around theworld in order to reap efficiency gains.
To sum up, the central argument of this brilliant, authoritative and comprehensivestudy is that introducing competition into previously monopolized and regulated networkutilities is the key to achieving the full benefits of privatization. It should be read by allthose who want to understand the political economy of regulation and privatization.
Eli GoldsteinDepartment of Economics,
Bar Ilan UniÕersity,52900 Ramat-Gan, Israel
E-mail address: [email protected]
Ž .PII: S0176-2680 00 00037-9
