Nationalisation Vs Privatisation

Question 1

What is nationalisation?

Answer 1

The ownership of assets by the state (e.g. gov run firms)

Question 2

What are some positives of nationalisation?

Answer 2

• more focus on service provision (not a focus on profit)
• gov will consider social costs and benefits when making output decisions - so less likely to experience market failures arising from externalities
• public sector can have macroeconomic control - e.g. controlling inflation by manipulating public sector wage and maintaining levels of employment if recession looks likely
• protects key industries

Question 3

What are some arguments against nationalisation?

Answer 3

• risk of diseconomies of scale
• no profit motive leads to - lack of incentive to minimise costs, lazy and wasteful and lack of supernormal profits (so less dynamically efficient)
• not experts in the industry
• burden on the tax payer of nationalisation - opportunity cost
• risk of moral hazard
• political priorities overriding (may have other incentives, e.g. to win votes)

Question 4

What is privatisation?

Answer 4

The process of the transfer of assets from the public (gov) sector to the private sector

Question 5

What’s some positives of privatisation?

Answer 5

• better incentive for businesses to be run efficiently and thereby achieve improvements in economic welfare
• its regarded as an important supply side policy to drive competition and improve productive and dynamic efficiency
• not a drain on the gov budget

Question 6

What are some drawbacks of privatisation?

Answer 6

• argue that already had competition in public sector, and the transfer of ownership has only replaced a public sector monopoly to a private sector monopoly that then requires regulation - not necessarily going to be more efficient. (Yet this does depend upon competition before and after)
• decrease in investment and large scale reductions in employment as privatised businesses have sought to cut their operating costs
• private sector monopolies will not act in societies best interests - e.g. crucial loss making services will be cut

Question 7

What do these factors depend upon?

Answer 7

• whether they face competition in the private sector
• how important/essential the service/good is
• whether PPP (Public Private Partnership) may be better - both Gov and private (could work better together)
• whether regulation is better or not - private firms are run with regulation from the gov