6.4 Public ownership and Privatisation

Question 1

What is public ownership?

Answer 1

Public ownership is the provision of goods and services by government

Question 2

What are the benefits of public ownership?

Answer 2

• Potential for huge economies of scale
• More focus on service provision
• Less likely to be market failures from positive and negative externalities
• More macroeconomic control

Question 3

What are the drawbacks of public ownership?

Answer 3

• Diseconomies of scale
• Lack of incentives to minimise costs
• Lack of supernormal profit
• Expensive burden on the taxpayer
• Higher prices due to low competition
• Political priorities override commercial issues

Question 4

What are some evalutory points for public ownership?

Answer 4

1. Funding v delivery - yes nationalisation has a huge cost, but if actually the end result is consumers get increased public services - is it worthwhile?
2. Competition in private sector may solve the problem
3. Role of regulation of private industry
4. Size of sector firms - if private sector are firms are large and benefiting from large economies of scale might outweigh potential for diseconomies of scale when nationalising
5. Objectives of firms - not all private firms want to profit maximise, they could have an allocative efficiency objective / corporate social responsibility objective

Question 5

What is privatisation?

Answer 5

Privatisation is the transference of assets from the government to privately owned businesses

Question 6

What are the benefits of privatisation?

Answer 6

• Raising revenue for government
• Reduces public spending and government borrowing
• Promotes competition
• Promotes efficiency
• Popular capitalism

Question 7

What are the drawbacks on privatisation?

Answer 7

• Monopoly abuse
• Short-termism wins
• Ignoring externalities

Question 8

What is regulation?

Answer 8

Regulation is the creation of rules and sanctions within an industry in order to modify the economic behaviour of firms, which can restrict market freedom and can impose additional costs on businesses.

Question 9

What is deregulation?

Answer 9

Deregulation is the opening up of markets to new competition through the removal of rules and regulations that created barriers to entry, to increase efficiency of markets.

Question 10

How can regulation affect privatised markets with monopoly power?

Answer 10

Privatisation leads to monopoly power as most firms privatised operate in markets with barriers to entry such as large economies of scale.
This can be countered through regulation and deregulation.

Question 11

What are the arguments for regulation?

Answer 11

• Protecting consumers against the abuse of monopoly power that would lead to higher prices, supernormal profits and allocative inefficiency
• To create an environment that will encourage firms to strive for productive efficiency through reduced costs
• To ensure quality and choice are maintained in monopolistic markets
• To reduce the monopolistic power of firms

Question 12

What are the arguments for deregulation?

Answer 12

• The creation of competitive markets will lead to economic efficiency
• Productive efficiency is created as firms strive to reduce costs in order to compete effectively
• Allocative efficiency is created as firms strive to meet consumer demand by reducing price and providing a greater range of products
• Less government intervention allows firms to produce to the needs of the market