4.1.8.8 Public ownership, privatisation, regulation and deregulation of markets Flashcards
Define public ownership
Government ownership of firms, industries or other assets
Define nationalisation
The transfer of assets from the private sector to public ownership
Advantages of public ownership
- Taking account of externalities
- Social welfare
- Strategic importance
Advantage of public ownership: taking account of externalities
- Nationalised monopolies - arguably more likely to do so - are not responsible to shareholders who seek profit maximisation
Advantage of public ownership: social welfare
- More likely to produce at an allocatively efficient output rather than restrict output in order to maximise profits
- May mean, for example, in the area of transport - loss-making routes such as rural bus services, which a profit-seeking firm might not offer, would still be provided
Advantage of public ownership: strategic importance (key industries)
- Historically - key industries such as rail, energy, steel and water - regarded as the ‘commanding heights’ of UK economy
- These industries too important to be run by private organisations - might cut corners to maximise profits
- ‘Too big to fail’ argument - used to support the partial nationalisation of several UK banks following the financial crisis of 2007-08
Disadvantages of public ownership
- Lack of dynamic efficiency
- Lack of expertise
Disadvantage of public ownership: lack of dynamic efficiency
- Ability of govt to ‘subsidise’ organisations from tax revenue - and a lack of pressure to maximise profits - may lead to a lack of dynamic efficiency
- Critics of public ownership might point to many years of under investment in the UK’s transport network
- Absence of competition
Disadvantages of public ownership: lack of expertise
- Some economists argue - that the best managers and leaders found to be in private sector
- Financial rewards may be significantly higher - rather than the public sector
Define privatisation
- The sale of govt-owned assets to the private sector
Advantages of privatisation
- Raising extra revenue for the govt
- Promoting competition
- Promoting efficiency
- Popular capitalism
Advantage of privatisation: raising extra revenue for the govt
- Can generate significant short-term revenue
- At height of the ‘privatisation era’ - in the 1980s - several billion pounds a year generated
Can be reinvested into remaining public services
Advantage of privatisation: promoting competition
- In theory - selling state-owned firms to the private sector exposes them to potential competition
- Previously - they were protected by govt monopoly
Advantage of privatisation: promoting efficiency
- Free market supporters - would argue that incentives created by profit motive lead firms to cut production costs to remain competitive - productive efficiency
- Competition may drive these firms to be become allocatively efficient - therefore, can see increase in consumer surplus
- Reduction in x-inefficiency (waste)
- Incentive to be efficient - investing over time - dynamic efficiency
Advantage of privatisation: popular capitalism
- Encouraging greater share ownership by the general public - may lead to greater pressure on firms to act in the public interest
Disadvantages of privatisation
- Exploitation of monopoly power
- Short-termism
- Ignoring externalities
Disadvantage of privatisation: exploitation of monopoly power
- Critics would argue - that privatised monopolies may lead to a worse allocation of resources
- Profit-maxing monopolies restrict output below productively and allocatively efficient levels - to generate SNP
- Would lead to a loss of economic welfare compared with a state-run monopoly
Competition not always guaranteed
Disadvantages of privatisation: short-termism
- Pressure from shareholders who demand annual dividend may mean a focus on cost-cutting to maximise short-term profits - rather than on long-term investment projects
- May include closure of any sections of a business that are making losses - e.g. railway branch lines or countryside bus routes
Disadvantages of privatisation: ignoring externalities
- Private firms may ignore the negative as well as the positive externalities associated with their activities
- It wouldn’t be profitable to take into account the spillover effects of their actions - again leading to a loss of economic welfare compared with a state-run monopoly
Define regulation
- Involves the imposition of rules and laws that restrict market freedom
Comes in the forms of - external regulation and self-regulation
External regulation
- Agencies such as the CMA (Competition and Markets Authority) - impose rules and restrictions
Self-regulation
- Organisations in particular industries voluntarily regulating themselves
E.g. - via membership of a professional governing body such as:
- the Institute of Chartered Accountants in England and Wales
- the Law Society
Is regulation justified?
- May impose additional costs on business - may reduce their profit and potentially compromise innovation and dynamic efficiency
- But it’s felt to be justified - in protecting consumers from abuse of monopoly power and external costs
However - may lead to REGULATORY CAPTURE
Define regulatory capture
- When the regulatory bodies (such as OFGEM in the case of gas and electricity suppliers) set up to oversee the behaviour of privatised monopolies come to be unduly influenced by the firms they have been set up to monitor
E.g. - 2016 - HMRC - giving generous tax deals to large that it is investing
Define deregulation
- The removal of rules and restrictions in order to increase the efficiency of markets
Examples of deregulation
- Various utilities markets - such as domestic energy, water and telecommunications
- To promote competition and market contestability
Benefits deregulation
Benefits:
- Removal of ‘red tape’ or excessive bureaucracy - may be argued to reduce firms’ costs of production - meaning consumers may benefit from lower prices
- May lead to a more contestable market by removing artificial B2E
- Could also help avoid the problem of regulatory capture
