Subsidizing inefficiency

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...a large part of that [Indian fiscal] deficit goes to financing the losses of the electric companies. Two and a half percent of GNP goes into power subsidies [emphasis added]; only half the electricity that's generated actually gets paid for. Some of the other half goes in unfortunate (we economists think) programs to give free power to the farmers. Unfortunately, the farmers who qualify for free power are the ones who are rich enough to be able to afford power in the first place. But having gotten free power, they let their neighbors tap into it. That's another portion of the power goes that way.

Then there are those who tap the lines. It's dangerous, but people know how to do it. So half the power doesn't get paid for even while there's a big increase in the fiscal deficit, while one has very expensive power for those who do pay, which includes large industry. What do you do if you're an industrialist with power that costs more to buy than you can generate it for? You buy a generator, which is socially wasteful. A lot of the investment in India is wasted by companies' generating their own power so as to bypass the power system. So while there have been some attempts at privatizing the power sector and at imposing a regulatory system, there are still big problems at the moment.

Read the whole article. Ah, and I stole this entire post from Tyler Cowen.

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