10.3 Nationalisation Flashcards
10.3 Nationalisation: What is nationalisation?
Nationalisation is the process of taking an industry into public ownership.
Nationalisation Pros: How do public sector firms benefit from larger economies of scale and productive efficiency?
Public sector firms may benefit from larger economies of scale and productive efficiency. Public sector firms are often natural monopolies with very high fixed costs and thus can benefit from lower average costs compared to smaller private firms. Furthermore, allowing many private firms to provide such services will lead to a wasteful duplication of resources and thus allocative inefficiency.
Nationalisation Pros: Why are public sector firms more likely to be allocatively efficient?
Public sector firms are more likely to be allocatively efficient because they focus on service provision and consider the full social costs/benefits involved. Public sector firms work to meet the needs and wants of the public to maximize social welfare while taking externalities into account in operations. Consequently, prices could be lower with no over/underproduction as resources will be allocated at the socially optimum level of output, perfectly following consumer demand, and fixing any prior market failures.
Nationalisation Pros: How does the public sector promote employment and skills training?
The public sector can promote employment and skills training by not pursuing profit maximization, which allows for greater employment possibilities and a focus on human capital development in work. As a consequence, productivity can be boosted while also making workers feel more valued and secure.
Nationalisation Pros: How can the public sector serve as a vehicle for macro-economic control?
The public sector can serve as a vehicle for macro-economic control because a large public sector in the economy implies a large number of public sector workers. Consequently, when inflation is running high, governments can counter this by restraining public sector pay increases. Additionally, governments can alter the level of employment to correspond with different stages of the economic cycle.
- What is the incentive for public sector firms to minimize costs, and why are they unlikely to operate at the minimum point of their average cost curve?
Public sector firms lack the incentive to minimize costs due to a lack of competitive pressure and a lack of a profit motive. Consequently, they are unlikely to operate at the minimum point of their average cost curve, forgoing economies of scale and not being productively efficient. This leads to higher prices and lower consumer surplus for consumers.
- How can public sector firms suffer from diseconomies of scale, and what are the consequences?
Public sector firms, as the sole provider in the market, may become too large and experience inefficiencies in the production process. This results in higher average costs as the firm expands, making it productively inefficient. Consequently, higher prices and lower consumer surplus can occur.
- Why may public sector firms be complacent and wasteful in production?
Public sector firms lack a profit motive and competitive pressure, which can lead to complacency and wasteful production. As a result, production may take place above the average cost curve, resulting in X-inefficiency and wasteful use of taxpayer’s money.
- What is the reason behind the lack of supernormal profit in the public sector, and what are the implications?
The objective of public sector firms is to satisfy the public with low prices and high output, which prevents the generation of supernormal profit. However, this lack of profit incentive also implies less innovation and technology improvements, ultimately leading to higher costs and prices in the long run.
- How can private sector involvement lead to lower prices and greater consumer surplus?
Private sector involvement introduces competitive pressure and a significant profit motive. This drives firms to strive for efficiency, lowering costs to remain competitive. As a result, prices may be lower, and consumer surplus can be greater. Private sector involvement also promotes allocative efficiency, as resources follow consumer demand, and productive efficiency, with full economies of scale exploitation.
- What is the downside of public sector provision in terms of cost and opportunity cost?
Public sector provision is expensive and funded through taxpayer money. This incurs a large opportunity cost, as the allocated funds could have been better used elsewhere, such as promoting education to reduce structural unemployment or supporting the diversification of the manufacturing base to rebalance the economy.
- What is the risk associated with moral hazard in public sector involvement, and why does it occur?
There is a greater risk of moral hazard with public sector involvement because politicians or government-employed managers are not directly accountable for their actions. As a result, they are more likely to take on significant risks, increasing the chance of project failure where the taxpayer ultimately bears the financial burden.
- How can political priorities override commercial issues on capital projects, and what are the consequences?
Political priorities can override commercial issues on capital projects due to the main objective of politicians being vote maximization. This means that key capital projects may not proceed to protect the politicians from losing popularity, even if such projects are in the long-term interests of society. As a consequence, important investments may not take place, leading to poor quality and quantity of infrastructure in the economy and lower competitiveness than what could have been achieved.
- What is the argument for nationalisation despite its high cost, particularly in delivering key public services?
Despite nationalisation being expensive, it can be argued that the delivery of key public services provides more benefits than costs. This is especially true when the service would be underproduced in the private sector as a merit good or not supplied at all due to being a public good or generating losses for profit-motivated private firms. Additionally, the delivery of such services can stimulate economic growth and generate higher tax revenues over time.
- How does the size of nationalised vs privatised firms affect the evaluation of nationalisation?
The size of nationalised and privatised firms is important in evaluating whether nationalisation will result in greater economies of scale benefits or losses. If one large state company supplies the entire market, there can be significant exploitation of economies of scale. In contrast, if private firms are smaller and unable to exploit the same economies of scale, the argument for nationalisation is stronger. However, if a nationalised firm becomes too big and suffers from diseconomies of scale, it could be argued that smaller, productively efficient private firms would promote better outcomes for society.
