8.8 Public Ownership, Privatisation, Regulation And Deregulation Of Markets

Question 1

The arguments for and against the public ownership of firms and
industries:

What is nationalisation?

Answer 1

• occurs when private sector assets are sold to the public sector.
• In other words, the government gains control of an industry, so it is no longer in the hands of private firms.
• The railway industry in the UK was nationalised after 1945.

Question 2

What is the result of nationalising an industry?

Answer 2

• Natural monopolies are created.
• This is because it is inefficient to have multiple sets of water pipes, for example.
• Therefore, only one firm provides water.
• Some nationalised industries yield strong positive externalities. For example, by using public transport, congestion and pollution are reduced.

Question 3

What is the objective of nationalised industries?

Answer 3

• Nationalised industries have different objectives to privatised industries, which are mainly profit driven.
• Social welfare might be a priority of a nationalised industry.

Question 4

What are some benefits of nationalising an industry?

Answer 4

• Greater economies of scale (lower AC, productive efficiency)
• Government ownership prevents exploitation of monopoly power (higher prices, inefficiency)
• Might yield strong positive externalities
• More focus on service provision-increased revenue for government
• Nationalised industries can be successful in running profitable services under government management
• EXAMPLE: Two large banks would have gone bankrupt (Lloyds, Royal Bank of Scotland) without government intervention. Since the crisis, the government has owned shares in these two banks showing that government ownership can provide greater stability than free-market forces.

Question 5

What are cons of nationalising an industry?

Answer 5

• Less profit motives-lack of supernormal profits, reduced dynamic efficiency, less innovation and investment
• Diseconomies of scale-high AC
• Higher prices due to lower competition-loss of consumer surplus
• Political interference
• Lack of incentives to minimise costs
• Highly expensive

Question 6

The arguments for and against the privatisation of state-owned
enterprises

What is privatisation?

Answer 6

• Privatisation means that assets are transferred from the public sector to the private sector.
• In other words, the government sells a firm so that it is no longer in their control.
• The firm is left to the free market and private individuals.
• It also covers the deregulation of the market.
• For example, British Airways was privatised in the UK and now operates in the
  competitive market.

Question 7

What are benefits of privatisation?

Answer 7

• Increase dynamic efficiency due to profit motive
• Increased competition leads to lower prices for consumers
• Lack of political interference
• Allocative efficiency

Question 8

What are some cons of privatisation?

Answer 8

• Natural monopolies might exploit consumers with higher prices
• Prioritise profit maximisation over social welfare
• Government loses out on dividends
• Fragmentation of industries

Question 9

What is regulation and its impact?

Answer 9

• By using regulation, the government could use laws to ban consumers from
  consuming a good.
• They could also make it illegal not to do something.
• Bans could be enforced for harmful goods, although they can still be consumed on the black market.
• Firms which fail to follow regulations could face heavy fines, which acts as a
  disincentive to break the rule.
• It could raise costs of firms, who might pass on the higher costs to consumers.

Question 10

What is deregulation and its impact?

Answer 10

• By deregulating the public sector, firms can compete in a competitive market, which should also help improve economic efficiency.
• Deregulation is the act of reducing how much an industry is regulated.
• It reduces government power and enhances competition.
• Excessive regulation is also called ‘red tape’. It can limit the quantity of output that a firm produces.

Question 11

What is the problem of regulatory capture?

Answer 11

• There is the risk of regulatory capture.
• This is when regulators start acting in the interests of the company, due to impartial information, rather than in consumer interests.
• This information disadvantage is a problem for regulators.
• The problem of asymmetric information can make it hard to determine what level a price cap should be imposed at.
• Without sufficient information, governments could make poor decisions and it could lead to a waste of scarce resources.