Privatization is the transfer or sale of government-owned assets/institutions to the private sector.
Privatization is most of the time associated with improved efficiency due to the profit incentive. Private companies will ensure they improve their operational efficiency in order to reduce their costs and improve on profits.
Privatization reduces the government’s political interference. The government sometimes seems incapable of making hard decisions especially when they impact their political footing such as layoffs and pay cuts which are bound to attract negative publicity.
Privatization urges improvements in the company through competition. When a state owned entity is privatized it loses its government protection and is forced to adapt to the market by providing better services or products in order to survive and thrive.
Privatization of certain state entities such as water and electricity authorities may just create single monopolies. These may eventually seek to increase prices at the detriment of the consumer with no controls.
The government loses dividends after privatization as seen with most successful companies that are developed through privatization. These dividends are instead channeled to wealthy individuals.
There are both pros and cons of privatizing companies or businesses held by the government.
Selling off a business gives the government access to instant capital which can be used elsewhere, as needed. It also ensures that the government will not need to worry about recurring expenses like wages, maintenance, etc. This is especially important for a business making a loss. And the government will not have to divert taxpayers' money to save such business. Privatization, however, will also mean that a profit making entity can no longer provide annual profits to the government, thus decreasing its sources of revenue.
Privatized operations are generally more efficient than government operations, especially since there is no support from the government. These businesses are dependent on themselves to earn profits and hence are operated efficiently. They are also not burdened with the political and social pressures that governmental organizations are riddled with. Additionally they are free to run the business as they see fit (within the realm of good operating practices) and not as per the public demand. Government may sometimes use its businesses to prop its own agenda, for example providing employment to under-privileged groups, etc.
When governments sell off companies that they previously owned, there tends to be a tradeoff. On the positive side, the companies generally tend to be run more efficiently. On the bad side, the government is no longer able to use the companies to pursue political or social goals.
When a company is privatized, it generally comes to be run more efficiently. The company no longer has tax dollars backing it up. It now has to make a profit on its own. This is good for the economy as a whole because the taxpayers’ money is no longer being used to prop up a company that is not as profitable as it should be.
However, the government is no longer able to use that company to try to improve society. For example, a government might have used its ownership of the airline to ensure that the airline would serve places that could not support air travel on their own. The government might also have used the airline as a source of jobs for people from underprivileged groups. By privatizing, the government gives up the ability to use the airline in these ways.