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

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

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