The topic for this blog is very relevant today with most of the sectors where Government has resources to be given to private sector being done through auctions. Auctions have a peculiar character of giving the seller a good and easier way of attaining maximising the value of the asset being sold. Considering this shouldn't auctions been the right way for Government to auction public resources.But at the same does not hold true for the buyer, auctions have been known to loss making to many buyers, thus the word "winner's curse". Government's auctions are unique in the sense the seller is the populace and the ultimate end user is the populace.
Lets consider a simple example to illustrate the above point.
Case A: Take a person who owns a house. Note that the ownership of the house is held by a single person and he wishes to sell the house. The buyer of the house will have to rent out the house to recover his cost. There are many people who are willing to take the house on rent and the seller is not one among them.
Case B: There is a family which owns a house and the ownership of the house is divided among these people. The buyer as in Case A has to rent out the house to recover his cost. But in this case few of the members of the house have to stay in the house and are willing to rent it from the buyer.
In Case A, the seller is justified to go for an auction as he gets the maximum price and as he is not going to rent of the house, he is bothered with the fact that higher sale price translates to higher rental value. Whereas in Case B, the seller may not be justified to go for the auction. Here few of the sellers will have to bear a higher renting cost as the sale price is very high. Thus as long as the marginal gain in higher sale price is able to reduce the marginal costs in higher renting, the auction system works fine. But in case the transfer of high sale price does not happen to individual sellers properly then he is worse off than earlier.
Case B is what happens when Governments auction public resources. The Government achieves a higher sale price, but due to leakages in the systems the transfer of the higher sale price is not effective and the consumer ends up paying a higher price for using the resources. For instance, the recent 3G auctions, may have given the Government high price but most of the gains are going towards reducing the deficits run by the Government rather than any transfer of wealth to the people through increased infrastructure or better facilities. The high prices are only going to increase the eventual usage price of the 3G services. Thus the consumer may be better off by not having an auction itself.
The high price also raises the question of viability of the service itself. High price of usage may deter eventual consumers and the company which has one the auction may be forced to reduce prices thus incurring losses. This is also disadvantageous for the customer as eventually the company might stop providing the service.
In case of the public resources, I think one way to be followed by the Government is have an auction on both the highest price for the resource and lowest end user price for the eventual consumer. This would be able to generate higher price as well as restrict the consumer getting better services.
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