3.8.8 - Public Ownership, Privitisation, Regulation and Deregulation of Markets

Question 1

What is public ownership?

Answer 1

Ownership of industries, firms and other assets such as social housing by a central government or local authority.

The state acquiring such assets is known as nationalisation.

Question 2

When did the main period of nationalisation occur in the UK?

Answer 2

Post Second World War under Clement Attlee’s Labour party.

Question 3

How did the Labour governments of the 1940s and 1950s justify nationalisation?

Answer 3

In order to state plan effectively, the ‘commanding heights’ of the economy were required.

Commanding heights being coal, railways, steel etc.

Question 4

How can public ownership be used with reference to monopolies?

Answer 4

In industries with natural monopolies, the state can intervene and nationalise it.

Question 5

What is temporary nationalisation?

Answer 5

Temporarily taking firms into public ownership as they are regarded as ‘too important to fail’.

An example of this was the bailout of Northern Rock, Lloyds, RBS and HBOS during the 2008 financial crisis.

Question 6

What is privatisation?

Answer 6

The transfer of publically owned assets to the private sector.

Question 7

What is the case for privatisation?

Answer 7

• Revenue raising
• Reducing public spending and government borrowing
• The promotion of competition
• Promotion of efficiency
• Popular capitalism

Question 8

Why is revenue raising a case for privatisation?

Answer 8

If the government sells off a valuable asset to a private firm, they can make up to £4 billion a year.

However, you can only sell an asset once so this is a one-off payment.

Question 9

Why is reducing public spending and government borrowing an argument for privatisation?

Answer 9

Selling off loss making businesses reduces public spending on subsidies to ensure firms remain afloat.

Question 10

Why is the promotion of competition an argument for privatisation?

Answer 10

Breaking up the monopoly should increase competition. The prevalence of technology driven competition and regulatory agencies such as Ofcom, Ofgem and the CMA significantly increased competition.

However, some monopolies are natural in nature, so removing the monopoly will not increase competition.

Question 11

Why is the promotion of efficiency an argument for privatisation?

Answer 11

The culture of nationalised industries make them resistant to change as the government will always bail them out.

The exposure to threat of takeover and the discipline of the capital market, the efficiency of the business should improve.

Question 12

Why is popular capitalism an argument for privatisation?

Answer 12

Privatisation extends share ownership to employees and other individuals who had not previously owned shares, thus adding the incentive for the electorate to support privatisation.

Question 13

What are the arguments against privatisation?

Answer 13

• Monopoly abuse
• Short-termism over long-termism
• Selling the ‘family silver’
• Free-lunch syndrome

Question 14

Why is monopoly abuse an argument against privatisation?

Answer 14

For the instance of natural monopolies, breaking up the nationalised monopoly will promote monopoly abuse as weakly regulated and less accountable private monopolies will abuse their power more than nationalised industries will.

Question 15

Why is short-termism over long-termism an argument against privatisation?

Answer 15

Many investments made in state-owned monopolies are only be profitable in the long-run.

Under private monopolies, these investments will not be made as company boards focus on short-term benefits such as delivering dividends to keep shareholders and financial institutions happy.

However, in nationalised industry, an argument is that nationalised industries are starved of funding by the government to keep government spending down.

Question 16

Why is selling the ‘family silver’ an argument against privatisation?

Answer 16

If a private sector were to sell capital assets in order to raise revenue to pay for current expenditure, the shareholders would be rightly furious.

In a similar vein, the sale of assets from the government to increase short-term wages or salaries should make taxpayers furious.

Question 17

Why is the ‘free lunch syndrome’ an argument against nationalisation?

Answer 17

State-owned assets have been sold too cheaply for their actual value.

The share prices of newly privatised industries are normally pitched at a level to almost guarantee a risk-free capital gain. However, this is not totally a free lunch as there is an opportunity cost in that you cannot invest that money elsewhere.

Question 18

What is a ‘free lunch’ in economics?

Answer 18

A situation in which there is no cost incurred by the individual receiving the goods or services being provided.

Question 19

What is regulation?

Answer 19

The imposition of rules and other constraints restricting freedom of economic action.

Question 20

What are the types of regulation?

Answer 20

External regulation
Self-regulation

Question 21

What is external regulation?

Answer 21

An external agency lays down and enforces rules and restraints.

i.e. the Competition and Markets Authority (CMA)

Question 22

What is self-regulation?

Answer 22

A group of individuals regulating themselves such as the BMA (British Medical Association) or Law Society.

Question 23

How do governments use regulation in relation to market failure?

Answer 23

In an effort to correct market failure, governments will use regulation to try and achieve a socially optimal level of production and consumption.

Question 24

What are the instances of regulation to increase consumption of goods?

Answer 24

Free education.
Free healthcare.

Question 25

What are instances of regulation to reduce consumption of goods?

Answer 25

Smoking bans.
ULEZ pricing.

Question 26

What is an example of regulation to reduce production of goods?

Answer 26

The over-production of externalities such as environmental pollution.

Question 27

What are some examples of regulation to reduce social socsts of market activity?

Answer 27

Health and Safety at work.
Anti-discrimination legislation.

Question 28

What are the advantages of government regulation?

Answer 28

Necessary to protect:
* Consumers from harmful products and to maintain quality standards
* Workers from labour market exploitation
* The environment
* Children and old people from exploitation and abuse
* People from self-harm

Essentially, regulation is necessary to enable markets to perform well and limit market failure damages.

Question 29

What is deregulation?

Answer 29

The removal of previously imposed regulations.

Question 30

What are the main justifications for deregulation?

Answer 30

• The promotion of competition and market contestability by removing artificial barriers to market entry.
• Removal of ‘red tape and bureaucracy imposing unnecessary costs on economic agents

Question 31

What are the disadvantages of government regulation?

Answer 31

• Too much ‘red tape’ and unnecessary bureaucracy
• Compliance costs are too high
• There is too much interference in individual economic decision making

Markets perform more efficiently and incur lower costs.

Question 32

What has the justification for deregulation and economic liberalism mostly been?

Answer 32

The theory of contestable markets.

Removal of barriers to entry create incentives for both new firms to enter and established firms to behave in a more competitive way.

Question 33

What is regulatory capture?

Answer 33

The problem when regulatory agencies act on behalf of regulated firms rather than consumers they are supposed to protect.

Question 34

What is an example of regulatory capture?

Answer 34

The director general of Oflot accepted free air tickets and other ‘sweeteners’ from the lottery companies he was supposed to regulate.

This can occur due to the principal-agent problem.

Question 35

How can regulatory capture occur without illegality?

Answer 35

The close contacts between heads of regulatory agencies and firms may lead to the regulator becoming predisposed to the views of the firms rather than those of the consumer.

In a slightly more contentious vein, the regulator often relies on information supplied by the regulated firms meaning the information could be biased.

Question 36

Why do proponents for deregulation argue against regulatory capture?

Answer 36

Even in instances where there is no illegality or bias, regulators have an economic incentive to create more rules and regulations to justify their jobs.

Regulation acts as an informal tax upon the regulated, raising production costs and therefore consumer prices.

Question 37

How did the Labour governments of the 1940s and 1950s justify nationalisation?

Answer 37

In order to state plan effectively, the ‘commanding heights’ of the economy were required.

Commanding heights being coal, railways, steel etc.