Privatisation, deregulation and nationalisation Flashcards
What is privatisation
Privatisation is when state-owned assets are sold to the private sector, where there is more competition and firms strive for efficiency due to a greater profit incentive
How can you show the benefits of privatisation on a diagram
Show the market moving to more competitive outcomes i.e. a lower price and higher quantity, because lots of private firms means increased competition in the market
How does privatisation impact allocative efficiency
Firms want to produce goods and services which consumers want and are high quality, which increases consumer satisfaction and allocative efficiency
How does privatisation impact X efficiency
Less waste as firms drive down costs to remain competitive in the market and maximise profits
How does privatisation impact dynamic efficiency
Innovation and dynamic efficiency may be part of the market and competition, meaning firms have to do it to stay ahead of rivals even at low profits due to high competition
Good for consumers as leads to lower prices over time
What are the disadvantages of privatisation
- There may be limited competition in the industry e.g. due to high barriers to entry or imperfect information. This could lead to uncompetitive outcomes which reduce static efficiencies and increase waste
- Firms will leave the industry if they are making a loss unlike a government who may stay if it provides socially desirable services to consumers
- State run natural monopoly would have had huge economies of scale so increasing competition reduces EoS in the market, leading to productive inefficiency
What are evaluation points on how successful privatisation would be
- Depends on level of competition after privatisation
- Depends on level of government regulation as more regulation leads to competitive outcomes, less regulation could lead to monopolies and oligopolies
What is deregulation
When the government reduce legal barriers to entry in given industries to incentivise more firms to enter the market
How can you show deregulation on a diagram
- More competition so show movement from monopolistic outcomes to P=MC i.e. can show gain in consumer surplus
(This is the same as the privatisation one)
What are the advantages of deregulation
- More firms means more consumer choice and firms will increase quality and produce at P=MC to satisfy consumers and get ahead of competition increasing allocative efficiency
- Productive and X efficiency increase as firms want to minimise costs and waste to stay ahead of competitors
- Increased dynamic efficiency as firms likely to reinvest any profits they make in innovation and new tech to get ahead of competition, as it will lower costs, prices so increase market share
What are the disadvantages of deregulation
- More competition is bad in a natural monopoly
- It could be that very few of the new firms can survive so a local monopoly or oligopoly may still form in the long run e.g. UK bus market where despite deregulation, there is now a local monopoly
What are evaluation points for deregulation
- Short run benefits but local monopoly in long run causes government failure
- Other barriers to entry (non-legal) may be very high so new firms still don’t enter the market
- Whether a local monopoly or oligopoly will form depends on level of government regulation
What is nationalisation
The process of taking an industry into public ownership i.e. the government
What are the benefits of nationalisation
- Greater economies of scale potential as one firm can produce more quantity (leads to productive efficiency, lower costs, lower prices)
- The government may focus more on maximising social welfare, leading to allocative efficiency and more consumer surplus due to lower price
- Less likely to be market failures as governments consider external costs to 3rd party more so produces at social optimum and allocative efficiency instead of only looking at private benefit
- Governments can use the public sector for macro-economic control e.g. changing wages to control inflation or employing more workers to reduce unemployment
What are the drawbacks of nationalisation
- Could be diseconomies of scale if the company is too big, so less productive efficiency, higher costs, higher prices
- Lack of profit incentive so may not minimise costs leading to X inefficiency
- Less supernormal profits as less profit incentive so dynamic inefficiency which is bad for consumer in long run
- Expensive for taxpayer (e.g. first buying the assets from private sector, then maintaining sector and paying wages). So big opportunity cost
- Less competition could cause complacency, leading to monopoly outcomes like allocative inefficiency
- Greater risk of moral hazard e.g. politicians make riskier decisions as burden is on taxpayer not them
- Political priorities may override commercial issues e.g. politicians don’t take any risk as they don’t want to risk reputation for election
What are evaluative points for whether nationalisation will be successful
- Depends on what governments do with the money to improve quality of services
- Public private partnership maybe better as you get best of both i.e. efficiency gains of private and social welfare is maximised
- Regulating private might be better decision for government, especially if the existing level of competition in the private sector is high so just needs regulation to be maintained
- If private sector firms are already large and have high economies of scale, nationalisation is more likely to lead to diseconomies of scale
- Depends on the objectives of private sector firms as they may not be profit maximising so no need for nationalisation
What should you do in essays on these topics
(don’t need to memorise but just advice)
Don’t just regurgitate the points, actually link it to the context of the question and industry and make sure nothing you say contradicts as sometimes the benefits contradict with the drawbacks
