Nationalisation Flashcards
What is nationalisation?
The process of taking privately controlled companies, industries or assets under government control
What are 3 main aims of nationalisation?
- guarantee the production of key economic goods
- correct market failure
- exploit economies of scale
What is an example of a key industry which could be argued should be nationalized for the national interest?
Steel as it is a major factor of production, however there is always the risk of government failure, which in theory always happens as free markets function best
Why would a monopoly be especially bad if it is a market essential for the national economy?
Because monopolies under allocate, for example healthcare is a key industry that we cannot afford to under allocate
Why is the government much more likely to reach allocative efficiency than a monopoly?
Monopolies seek to profit maximize whereas the government seeks to reach allocative efficiency as they are not concerned with profit, instead concerned about social welfare due to political gain
Will a nationalized firm consider externalities?
Yes, unlike a privatized firm. Private firms only consider the private costs of production rather than the social costs, government’s consider social costs for political gain
Why can nationalized firms have huge economies of scale?
Nationalised industries are state wide monopolies, thus huge firms with huge outputs leading to significant economies of scale lowering AC
When would it be best to argue for nationalisation?
It would be best in an essential market that is a natural monopoly
How do diseconomies of scale relate to nationalised industries?
Nationalisation can in fact lead to diseconomies of scale when substantial economies of scale are not present leading to higher average costs and price
Are nationalised industries productively efficient?
No as it is a pure monopoly that doesn’t seek to profit maximise. Furthermore, x inefficiency can occur as they’re not incentivised to reduce the AC curve
Why can nationalised industries suffer from moral hazard?
The managers of nationalised industries do not risk their own money and investments which could lead to reckless behaviour, also losses can be covered by government revenue
Why could a nationalised firm have limited scope to raise capital for long term investment?
They’d have to compete with other government spending, however government’s of developed economies can raise much more finance than private firms
Why is it a disadvantage that decisions of a nationalised industry could be political rather than economical?
Political decisions include raising wages and employment to the point where it creates inefficiency and unnecessary costs. However these could be better social outcomes as nationalised firms consider social welfare
Why may a nationalised firm have high prices?
It will have high AC due to a lack of competition meaning it doesn’t have to be productively efficient, therefore prices will be high to cover AC, and demand is inelastic
Who is in control in a nationalised firm, managers or shareholders?
Managers are in control
Under which conditions should nationalisation only ever take place? Which strategies would be preferable in other scenarios?
Nationalisation should only take place when a clear market failure is caused due to natural barriers. Otherwise the government should try to make the market more contestable or use regulation to reduce market failure as it reduces the chances of government failure
