1.4.4 State provision of goods and privatisation

Question 1

Privatisation

Answer 1

The transfer of the ownership of a firm/industry from the public sector to the private sector.

Question 2

What does privatisation cover?

Answer 2

• The sale of public (nationalised) firms – e.g. Royal Mail was privatised through the sale of shares.
• Contracting out services – a government pays a private firm to carry out work on its behalf. E.g. cleaning government-owned buildings such as hospitals or schools.
• Competitive tendering – private firms bid (or compete) to gain a contract to provide a service for the government. Firms will compete on price and the quality of the service offered.
• Public Private Partnerships (PPPs) - a private firms works with a government to build something or provide a service for the public. For example, in the UK some hospitals or schools are built by a private firm, then the government leases the buildings from the firm (usually for a long period of time).

Question 3

Advantages of privatiastion

Answer 3

• Increased competition improves efficiency and reduces x-inefficiency.
• Improves resource allocation – privatised firms have to react to market signals of supply and demand.
• PFIs enable the building of important facilities that the government might not be able to afford to build.
• PFIs means lower taxes in the short run because the government won’t pay for the new facility immediately.

-The government gains revenue from selling firms.

Question 4

Disadvantages of privatisation

Answer 4

• A privatised public monopoly is likely to become a private monopoly – so extra measures such as deregulation need to be taken to avoid this.
• Privatised firms may have less focus on quality and safety, because they are more focused on reducing costs and increasing profits.
• The new private firm might need regulating to prevent it from becoming a private monopoly – this increases the costs for taxpayers.
• A PFI will often cost more in the long run than it’s worth – so it adds to government debt and may not represent value for money.
• PFIs mean higher taxes for future generations to pay for the cost of the government leasing the facility.

Question 5

The state provision of goods

Answer 5

Where governments directly provide some goods and services in an economy because they believe the free market will fail to provide them at the right quantities (if at all), and at a fair price.

Question 6

How is state provision of goods funded?

Answer 6

Governments use tax revenue to pay for certain goods and services so that they’re free, or largely free, when consumed.

Examples in the UK include the NHS, state education, waste disposal and the fire and police services.

Question 7

Why do governments provide goods/services?

Answer 7

Governments might provide certain things to increase the consumption of merit goods, such as education and health. This can have long-term economic benefits (e.g. by increasing people’s skill level and life expectancy).

Free provision of services can help to reduce inequalities in access (e.g. due to differences in wealth). It can redistribute income – a lot of the money to pay for the services comes from taxing wealthier citizens.

The level of state provision is a value judgement made by the government – they decide the amount of a good/service they provide. This decision is often political and depends on how important the governments deems the good/service is to society.

Question 8

Disadvantages of state provision

Answer 8

State provision may mean there’s less incentive to operate efficiently as there is no profit incentive.

State provision may fail to respond to consumer demands, as it lacks the motive of profit to determine what’s supplied.

The opportunity cost of state provision of a good or service is that other goods or services can’t be supplied.

Question 9

Example of state provision of goods: Healthcare

Benefits of state provision of healthcare

Answer 9

The UK government funds the NHS so that society benefits from the positive externalities of healthcare. For example:

• The consumption of healthcare can contribute to a healthier, happier population.
• Free provision means that healthcare is available to all, regardless of wealth or income.
• It can reduce the number of days people take off work due to sickness, increasing productivity.

Question 10

Example of state provision of goods: Healthcare

Drawbacks of state provision of healthcare

Answer 10

• Provision that is free at the point of delivery can result in excess demand, leading to long waiting lists. Demand for healthcare in the UK increased dramatically since the NHS was introduced.
• The lack of a price mechanism might make hospitals and clinics less conscious of resources.
• Limited budgets and the need to cover a whole population mean it isn’t always possible to respond to the wants and needs of individuals.