In the 2016 Cambridge AS Economics syllabus there is a new topic which looks at the areas of privatisation and nationalisation in an economy. Below are some notes on the topic.
Nationalisation is when a government chooses to take an industry into state ownership in order to safeguard the supply of a good or service.
Privatisation is the transfer of ownership of property or businesses from a government to a privately owned entity.
Potential Benefits of Privatisation
- Improved Efficiency – private companies have a profit incentive to cut costs and be more efficient.
- Lack of Political Interference – Governments are motivated by political pressures rather than sound economic and business sense.
- Short Term view – A government many think only in terms of next election
- Shareholders – a private firm has pressure from shareholders to perform efficiently
- Increased Competition – more firms mean greater competition and efficiency
- Government will raise revenue from the sale – only a one off benefit and future dividends are lost.
Potential Benefits of Nationalisation
- Natural Monopoly – Many key industries nationalised were natural monopolies. This means the most efficient number of firms is one.
- Externalities – Some of the nationalised industries had significant positive externalities. A government can run public transport system could invest in public transport to help improve the economic infrastructure.
- Welfare Issues – Some industries play a key role in the welfare of consumers and citizens. Government provision means that needy groups can be looked after and provided with basic necessities.
- Industrial Relations – Labour unions often favour nationalisation because they feel they may be better treated by the government – rather than a profit maximising monopoly.
- Government Investment – Some industries require long-term investment to improve services over time. This long-term investment may not be profitable in the short-term, so without government intervention they may suffer from lack of long term investment.