NATIONALISATION

Question 1

What is Nationalisation?

Answer 1

When ownership of a private sector firm is transferred to the public sector

Question 2

Advantages of Nationalisation

Answer 2

• Greater Economies of Scale as Gov’t will produce on larger scale - Productive Efficiency increase and lower costs could be passed on with lower prices
• More focus on societal welfare so less likely to be market failure from EXTERNALITIES as more focus will be on limiting social costs - Allocative Efficiency increases

Question 3

Disadvantages of Nationalisation

Answer 3

• Lack of profit motive will see less incentive to minimise costs - X-inefficiency, Prices at high level, more WASTE
• Lack of supernormal profit so less dynamic efficiency
• Expensive - burden tax payers
• Risk of ‘Moral Hazard’ - where ones taking risk (i.e. Gov’t) will not bear the burden (Taxpayers will)
• Political priorities may override commercial issues; may promote risk aversion in fear of losing public support

Question 4

Evaluation of Nationalisation

Answer 4

• DISEconomies of scale could arise due to increased scale of production
• Does benefit of the provision of the good in question outweigh financial cost; is it worth it?
• Is full nationalisation necessary; partnerships with private sector? Stronger regulation from industry regulators?
• Depends on type of good; good for necessities but other sectors may benefit from competition and innovation from supernormal profits

Question 5

Examples of Nationalisation

Answer 5

• Swedish Alcohol Industry - ‘System Bolaget’
• ‘British Rail’ in 1948 -1993

Question 6

Need for Nationalisation

Answer 6

• To stop exploitation of consumers in industries where firms have become too driven by profit
• To limit negative externalities as Gov’t can now control levels of consumption

Question 7

What is Privatisation?

Answer 7

When ownership of a public sector firm is transferred to the private sector

Question 8

Advantages of Privatisation

Answer 8

• Profit motive of private sector firms will incentivise firms to cut down costs; increased productive efficiency in LR
• Competition in industry will decrease X-inefficiencies
• Supernormal profits could be used to fund investment and R&D; increased dynamic efficiency
• Sale of assets/firms will be significant revenue for government; could be used to decrease national debt or to fund expenditure on public/merit goods

Question 9

Disadvantages of Privatisation

Answer 9

• Pursuit of profit over societal welfare increases potential for market failure from externalities
• Loss of economies of scale - less productive efficiency

Question 10

Evaluation of Privatisation

Answer 10

• Ownership of a business (state or private) is probably less important than market contestability; firm may be privatised but high barriers to entry into the market may see monopoly outcomes.
• Firms may strive to meet consumer demand more in order to make profits therefore not as much allocative inefficiency (possibly if gov’t regulation ensures this)
• Depends on level of competition post privatisation

Question 11

Need for Privatisation

Answer 11

To increase efficiency in markets that became too inefficient under public ownership