4 Public Ownership, Privatisation and Regulation

Question 1

Reasons for nationalisation

Answer 1

Natural monopoly arguments:

• economies of scale may mean that competing provision
  of services is wasteful.
• The scale of production that achieves productive efficiency may be a high proportion of total demand
• Associated with industries with a high ratio of fixed to variable costs and substantial infrastructure (telecoms, gas)

Improved industrial relations climate 

Redistribution of wealth

Presence of externalities

Question 2

Reasons for nationalisation in post-1945 period (what was nationalised?)

Answer 2

Nationalisation was the preferred state policy between 1945-51 to deal with natural monopoly, the deteriorating performance of key industries, (such as coal-mining and steel) and to help with post- war reconstruction

The public utilities (gas, water, electricity and the railways)and the Bank of England were also nationalised during this period

Question 3

How were nationalised industries run?

Answer 3

The nationalised industries were governed by boards appointed by government

Management pay was closely linked to civil service rates

There were a number of criteria set by the government to ensure good governance and practice

High employment and the avoidance of high costs

Question 4

Arguments for privatisation

Answer 4

Supply-side benefits: consumers can choose between suppliers, competitive pressures improve efficiency

Wider share-ownership

Reductions in state borrowing

Managerial freedom

Reduction in trade union membership?

Question 5

Arguments against privatisation

Answer 5

Absence of competition

• Efficiency is promoted by contestability not ownership
• Contestability refers to the credible threat of competition which is sufficient to induce firms to act competitively.
• in reality there may be low threat of competition from others entering the market

Presence of externalities
Undervaluation of state assets
Short-termism
Opportunity costs

Question 6

Objectives of regulators were to:

Answer 6

to create the constraints and stimuli that companies would face in competitive markets (through price caps, performance standards)

encourage actual competition by easing entry of new producers (telecommunications, gas and electricity supply)