Privatisation

What are the problems of privatisation? (Or evaluation points)

1) Barriers to entry - if there are significant barriers to entry, such as high fixed costs, it may prove difficult to increase competition. Industries like water and railways can be seen as a natural monopoly. Therefore, privatisation could create a single private monopolist and not actually increase competition. 2) Public services should be run in the public interest - many industries which were privatised are important public services, such as railways and gas. Therefore, it may not be appropriate to apply profit-maximising principles in these industries. 3) Positive externalities - industries such as railways have positive externalities, such as reduce pollution and congestion. Therefore, in a free market, they will be under-consumed. If the government manages these industries, it can make sure they overcome market failure and take external benefits into account.

What are the negatives of public ownership?

1) In public ownership, managers and workers may lack incentives to cut costs and be efficient. 2) Government firms may be reluctant to take decisions for political reasons, e.g. close down loss making coal pits. 3) An alternative to public ownership, is privatisation accompanied with deregulation (encouraging competition) and regulation of private monopolies, if necessary. Note: These same arguments can be made for renationalisation.

What are the benefits of public ownership?

1) Many industries are natural monopolies, making competition not possible; the government can avoid monopoly exploitation. 2) Government can take into account externalities, e.g. the positive externalities of railways. 3) Government can fund long-term investment, where profit making firms may not. Note: These same arguments can be made for renationalisation.

What are the benefits of privatisation?

1) Reduced government interference: state-owned industries, may be managed for political reasons, e.g. there could be under investment, because governments take the short-term view. 2) Removing borrowing limits: state-owned companies are subject to strict spending limits. Private companies are free to borrow and invest in new line, e.g. Chiltern Railways have invested in new lines and stock. 3) Private companies are usually more efficient: This is because, when working in the public sector, there is often little incentive to cut costs and increase profits. However private firms will have this profit incentive, therefore they are more likely to develop new and better products. 4) Improved public finances: Receipts from privatisation could help reduce government borrowing. However, this is a one-off income and the government will lose future profit revenues from losing ownership of the companies. 5) Increased competition: The main benefits from privatisation occur when there is successful deregulation and an increase in competition. This will lead to the benefits of more competitive markets: - Lower price leading to greater allocative efficiency. - Better quality of customer service, as firms compete for market share. - Firms must be more efficient, in order to cut costs and remain profitable.

How can governments regulate privatised industries?

1) Regulate prices - prevent excessive price increases. 2) Profit regulation - If the profitability of firms is excessive compared to similar firms, it may be a sign the company is abusing monopoly. 3) *Encourage competition* - by reducing barriers to entry 4) *Monitor performance* - monitor performance targets and investment levels, fines if the company falls below these targets., e.g. train companies must make sure a certain % of trains are on time.

Summary of advantages and disadvantages of private provision?

Ads: - Provides consumers with more choice. - If less people used the NHS, it would enable the government to lower taxes and reduce borrowing. - Enable shorter waiting lists for public and private services. Disads: - Difficult to introduce a profit incentive into public services such as health care; e.g. it is not practical to give performance related pay to nurses/doctors. - May increase inequality; people on low incomes cannot afford the private services. - Health is a merit good and will be under provided in a free market. Therefore there is a justification for government subsidy.

What forms can privatisation take?

Privatisation can take a number of forms including: - Private business runs a previously state-owned company. - When private businesses carry out contract work for the government. - When private businesses run one part of the industry while the government runs another, e.g. Trains and Standard Rail

What is privatisation?

Privatisation involves selling state-owned assests to the private sector. Privatisation is often accompanied by deregulation, which involves reducuing legal barriers to entry and opening up the market to more competition.

Evaluation of regulation of privatised industries. (Profit regulation, performance targets)

Profit regulation: - Taxes on profits may create a disincentive for a firm to cut costs and become more profitable, because they will lose out on a large portion of these profits. - Water companies have argued that they need substantial profit to finance expensive, long term investment. Windfall taxes could reduce long-term investment. Performance targets: - Companies may alter behaviour to meet certain criteria, e.g. train companies change timetable to give themselves more time to arrive, making it less likely they will be late. - Government regulation on performance targets has been criticised as being too weak. There is a lack of sanctions against firms who miss performance targets.