Government Intervention: Public Ownership Versus Privatisation (AQA A Level Economics)

• Public ownership is government ownership of firms, industries or other assets
  • Also known as state ownership
     

• Nationalisation is the transfer of assets from the private sector into public ownership
  • This is often used in the case for public goods and merit goods
     

Evaluating Public Ownership

Advantages

Disadvantages

Provision of goods that may not be provided or would be underprovided in a free market Nationalised industries can prioritise social welfare over profit Governments can take account of externalities. Some nationalised industries yield strong positive externalities E.g. By using public transport, congestion and pollution are reduced State-run monopolies are more likely to produce at allocatively efficient output Some industries were historically considered too important to be run by private organisations E.g. Water supply

The Government may lack the expertise to run the business Higher expenditure for the government which means higher taxes Publicly owned firms/industries tend to be inefficient and lack dynamic efficiency because they lack competition. This can lead to market failure Firms are hesitant to enter an industry when the dominant firm is owned by the government and has access to all of the government's resources Can create a natural monopoly For example, it is inefficient to have multiple sets of water pipes. Therefore, only one firm provides water

• Privatisation is the transfer of assets from the public sector (state) to the private sector
• The asset is then under the control of a firm and left to the free market and private individual's
• E.g. British Airways was privatised in the UK and now operates in the competitive market
  
  

Evaluating Privatisation

Advantages

Disadvantages

Raises revenue for the government The sale of state-owned assets can raise short-term revenue for the government Reduces public spending   Privatisation encourages new entrants to the industry as they feel they can compete more effectively with private firms which perhaps have less resources available Promotes efficiency Increased competition in the free market may create incentives for profit maximising firms to become more efficient and lower costs May lead to productive efficiency and dynamic efficiency Competition might also result in lower prices

Government assets are often sold well below their actual market value Privatised, profit maximising monopolies can restrict output to generate supernormal profits The price of the good/service usually increases as firms seek to maximise their profit Private firms often provide a substandard goods or services as they cut quality to increase profits Many privatised companies still maintain considerable market power and need to be regulated