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

What are the arguments for nationalisation?

Answer 37

• Greater economies of scale.
• Public sector can become a vehicle for macro-economic control.
• More focus on service provision.
• Market failures less likely to arise due to externalities.

Question 38

What are the arguments against nationalisation?

Answer 38

• Economies of scale can give way to diseconomies of scale.
• Lack of incentives to minimise costs.
• Lack of supernormal profit.
• Big burden on the taxpayer to nationalise and also bailout failing industries.
• Higher prices due to low competition (X-inefficiency due to no competition)
• Greater risk of moral hazard.

Question 39

Why are greater economies of scale a benefit of nationalisation?

Answer 39

Industries such as large scale manufacturing often have L-shaped LRAC curves.

Therefore, we will see productive efficiency gains, lower average costs and potential lower prices.

Question 40

Why is the improved focus on service provision a benefit of nationalisation?

Answer 40

The expectation is that the state-run monopoly will meet the desires of society, so there should be a lower chance of market failure, improving allocative efficiency.

The price is likely to be lower as well, which improves consumer surplus.

Question 41

Why do negative externalities fall in nationalised industries?

Answer 41

The government is always (hmm…) trying to maximise social welfare which therefore means they must look into the full social costs and social benefits.

This then means that the provision is going to more closely resemble the socially optimal point.

Again this improves the allocative efficiency of the industry.

Question 42

Why is the public sector as a vehicle for macro-economic control a benefit of nationalisation?

Answer 42

The government can more closely control the wages to ensure inflation remains on target. They can do this by increasing or lowering wages.

The government can also control unemployment levels. If the economy is entering the recession phase, the public sector can employ more people in the period of recession.

Question 43

Why are diseconomies of scale a negative of nationalisation?

Answer 43

Problems such as co-ordination, motivation and control set in, reducing efficiency. The costs per unit begin to increase, and therefore a loss in productive efficiency and increased prices for consumers.

Question 44

Why is the lack of incentive to minimise costs a negative of nationalisation?

Answer 44

There are no profits to be made. There is therefore a principal-agency problem in which the managers of the industry have no share in the ownership and therefore will choose to satisfice rather than maximise profits.

The risk of complacency and wasteful production also runs very high, increasing the x-inefficiency of the industry.

Question 45

Why is the lack of supernormal profits a negative of nationalisation?

Answer 45

Dynamic inefficiency will set in, as nationalised industries will not need to innovate or reinvest the profits into R&D.

Private firms are more likely to engage in reinvestment into R&D to ensure that they remain competitive in the market.

Question 46

Why is the high cost for the taxpayer a negative of nationalisation?

Answer 46

The cost of nationalisation is very high, so there is a major opportunity cost to nationalise any industry that could not be spent elsewhere.

There could have been a better rate of return by investing taxpayer money into other industries such as healthcare or education.

Question 47

Why are higher prices due to low competition a negative of nationalisation?

Answer 47

The law of unintended consequences can lead to a monopoly market in which quantities are limited and prices are higher.

The end result is major allocative inefficiency.

Question 48

Why is the greater risk of moral hazard a negative of nationalisation?

Answer 48

The costs of nationalised industry failure is not borne by the company, but by a third party (the government, but indirectly, the taxpayer).

The nationalised industries themselves know that they will be bailed out by the government, so may act in an overly risky way.

Question 49

What is the evaluative point for diseconomies of scale as a negative of nationalisation?

Answer 49

Some industries that require large scale manufacturing have an L-shaped LRAC curve, so disceonomies of scale almost never set in (if at all).

Question 50

Why are PPPs possibly better than full nationalisation?

Answer 50

You maintain the efficiency gains of the private sector alongside the minimisation of costs that come along with it, and the benefits of nationalisation to ensure that service quality is still high.

The taxpayer does not have to shoulder the full burden of nationalisation.

Question 51

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

Answer 51

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

Commanding heights being coal, railways, steel etc.