Privatisation Flashcards
definition of privatisation
the process of transferring ownership of a public asset or service from the government to the private sector
how can privatisation be achieved
sale of shares in a publicly owned company or the outsourcing of services to private companies
what is the intention of privatisation
to make markets more competitive and efficient
can also be to alleviate financial burden on government
what diagram could you use for privatisation and why?
monopoly diagram to show the contrast between a government owned monopoly (producing at allocative efficiency) and a privatised monopoly (potentially maximising profit)
what can you show on the diagram
privatisation in the UK
- Privatisation became big in the UK after the 1979 election. Conservative party under Margaret Thatcher pursued these policies after most industries had been nationalised after ww2.
- State-owned enterprises now contribute less than 2% of GDP and less than 1.5% of total employment.
Major privatisations include:
- British Airways
- British Gas
- Royal Mail
- London Underground
advantages of privatisation
Increase in allocative efficiency: assuming privatisation leads to competitive outcomes, greater allocative efficiency can be achieved
Reduced X inefficiency: firms must drive down costs to remain competitive now, so less waste.
Increase in dynamic efficiency: profit motive creates incentive for firms to be as efficient as possible, so they invest in innovation
disadvantages of privatisation
- We are assuming that when industry is privatised, firms will flock to enter. There may only be limited competition, so productive or allocative inefficiency may occur as they don’t need to drive down costs or make highest quality products for consumers
- Loss making services cut even if they are socially desirable. If they don’t make profit they won’t provide them-> consumers lose out
- Loss of natural monopoly and loss of economies of scale benefits which could have lead to productive efficiency
