4.1.8.8 Public ownership, privatisation, regulation and deregulation of markets

Question 1

Define public ownership

Answer 1

Government ownership of firms, industries or other assets

Question 2

Define nationalisation

Answer 2

The transfer of assets from the private sector to public ownership

Question 3

Advantages of public ownership

Answer 3

• Taking account of externalities
• Social welfare
• Strategic importance

Question 4

Advantage of public ownership: taking account of externalities

Answer 4

• Nationalised monopolies - arguably more likely to do so - are not responsible to shareholders who seek profit maximisation

Question 5

Advantage of public ownership: social welfare

Answer 5

• 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

Question 6

Advantage of public ownership: strategic importance (key industries)

Answer 6

• 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

Question 7

Disadvantages of public ownership

Answer 7

• Lack of dynamic efficiency

- Lack of expertise

Question 8

Disadvantage of public ownership: lack of dynamic efficiency

Answer 8

• 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

Question 9

Disadvantages of public ownership: lack of expertise

Answer 9

• 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

Question 10

Define privatisation

Answer 10

• The sale of govt-owned assets to the private sector

Question 11

Advantages of privatisation

Answer 11

• Raising extra revenue for the govt
• Promoting competition
• Promoting efficiency
• Popular capitalism

Question 12

Advantage of privatisation: raising extra revenue for the govt

Answer 12

• 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

Question 13

Advantage of privatisation: promoting competition

Answer 13

• In theory - selling state-owned firms to the private sector exposes them to potential competition
• Previously - they were protected by govt monopoly

Question 14

Advantage of privatisation: promoting efficiency

Answer 14

• 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

Question 15

Advantage of privatisation: popular capitalism

Answer 15

• Encouraging greater share ownership by the general public - may lead to greater pressure on firms to act in the public interest

Question 16

Disadvantages of privatisation

Answer 16

• Exploitation of monopoly power
• Short-termism
• Ignoring externalities

Question 17

Disadvantage of privatisation: exploitation of monopoly power

Answer 17

• 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

Question 18

Disadvantages of privatisation: short-termism

Answer 18

• 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

Question 19

Disadvantages of privatisation: ignoring externalities

Answer 19

• 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

Question 20

Define regulation

Answer 20

• Involves the imposition of rules and laws that restrict market freedom

Comes in the forms of - external regulation and self-regulation

Question 21

External regulation

Answer 21

• Agencies such as the CMA (Competition and Markets Authority) - impose rules and restrictions

Question 22

Self-regulation

Answer 22

• 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

Question 23

Is regulation justified?

Answer 23

• 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

Question 24

Define regulatory capture

Answer 24

• 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

Question 25

Define deregulation

Answer 25

• The removal of rules and restrictions in order to increase the efficiency of markets

Question 26

Examples of deregulation

Answer 26

• Various utilities markets - such as domestic energy, water and telecommunications
• To promote competition and market contestability

Question 27

Benefits deregulation

Answer 27

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