Privatisation Flashcards
Privatisation definition
Privatisation is the transference of assets from the government to privately owned
Examples
- National express
- British gas
- Royal mail
- Buses
Nationalisation definition
Nationalisation occurs when the government take a privately owned business into public ownership
Examples
- Bank of England (BoE)
- RBS
What is privatisation
- Sales of parts of nationalised industries to the private sector, e.g. Jaguar sold from British Leyland
- Sales of individual assets of governing bodies, e.g. council house tenants being allowed to buy their own homes
- Creation of private sector competition to state monopolies. Often removing regulations to allow for competition
- Compulsory competitive tendering. Local authorities are forced to tender to private companies for work such as refuse collection. Previously done by public sector workers
De-regulation
De-regulation is the opening up of markets to new competition through the removal of rules and regulations that created barriers to entry
Examples
- BT
- British rail
- British gas
Advantages of privatisation
- Revenue raising
> The sale of assets provides the Govt. with revenue - Reducing public spending and the Govt. borrowing requirement
- The promotion of competition
> Through breaking up the monopoly - The promotion of efficiency
- Popular capitalism
> The promotion of an enterprise and innovation cultures
Disadvantages of privatisation
The abuse of monopoly power
- When a state monopoly is privatised and then not well regulated
Short-termism versus long-termism
- Private investors unlikely to make necessary investments
Some loss making services may be dropped
- Loss makers may be dropped in the private sector = market failure, under-provision of public/ merit goods
Externalities
- Externalities may arise as privatised firms seek profit and ignore the external costs arising from their goods/ services.
- Nationalised industries may be more aware of negative externalities, like the impact on the wider environment e.g. British petroleum
Equity
- Equity privatisation may lead to a change in the pricing structure. Change in equity arising from ownership of share and divided payments - only the wealthy will benefit
The case for state ownership
Lower costs
- Economies of scale and more efficiency as competing companies are merged
Better management
- Private organisations are more interested in short-term profits where as the state will be more concerned about maximising net social benefit
Control of monopolies
- Nationalisation normally occurs in potential markets to prevent raising prices, output restrictions and unfair deals for consumers e.g. national gas company
Maximisation of social benefit improving ate allocation of resources
- Better working conditions for employees after nationalisation (in theory) and a reduction in negative externalities
The case against state ownership
Moral hazard
- If state owned industries cannot go bust
Limited gains in dynamic efficiency
- Due to lack of supernormal profits for innovation
Promotes unfair playing fields
- NHS v Private healthcare
- Loss making state airlines v the rest of the competition
Key concepts
- Economic efficiency
> Allocative (e.g. Monopoly pricing)
> Productive
> Dynamic - Funding versus delivery of key public services
- Public private partnerships
- The roles of regulatory agencies acting as surrogate competitor
- State aid inside EU
Regulation
Key aims of regulatory agencies
- Protecting the public interest
- Acting as surrogate competitor where monopoly power persists
- Clamping down on anti-competitive behaviour such as:
> Abuses of dominant position in a market
> Price fixing and market sharing
> Predatory pricing
> Exploiting information asymmetric e.g. false trading
- Introducing greater competition into markets
- Promoting industry research, innovation and improving standards of service
- Acting to protect and improve consumer welfare, protect the consumer against fraud, unfair practises
Regulatory tools
- Price controls e.g. price-capping regimes for different industries
- Output restrictions
- Legislation
- Prohibit certain behaviour
Aims of price capping
- Creating incentives for businesses (often utilities) to reduce unit costs by being more efficient and innovative
- Improve consumer welfare by keeping prices lower
- Price controls can help keep inflation down
Evaluating the regulators
- Costs of regulation are often high e.g. burden of red tape
- Regulation may stifle enterprise
- Dangers of “regulatory capture” (regulators working more in the interest of producers rather than consumers)
- Government Failure/ Regulatory failures: e.g. failures at FSA during the sub prime lending crisis
- Broader issued of unintended consequences of regulatory control of markets
