Privatisation and Nationalisation

Question 1

Advantages of Privatisation

Answer 1

• Greater competition reduces X inefficiency
• Managers become more accountable as they know poor performance will mean fall in profits
• Improves Government finances
• Firms can invest with certainty not worrying about government elections
• Reduces government interference with the price mechanism
• Workers will be more motivated as there is profit incentive

Question 2

Disadvantages of privatisation

Answer 2

• reduces positive externalities
• increases price so decreases consumer surplus
• If the market is a monopoly it is better to be government owned
• Some industries are necessary to be properly coordinated like water and electricity
• Less public interest
• Still a need for regulation

Question 3

Advantages of nationalisation

Answer 3

• reduces prices
• benefits social welfare and creates positive externalities
• Government guarantees minimum level service so all people can access it, reducing inequality
• Monopolies are better to be ran by the state
• Long term investments which improve quality

Question 4

Disadvantages of nationalisation

Answer 4

• Suffers from moral hazard and principal agent problem as managers know their losses will be covered
• No profit incentives to innovate
• Opportunity cost for government
• negative effect on government finances
• increased taxes
• X inefficiency

Question 5

Example of a public private partnership

Answer 5

Toll roads as private pays for construction of the road and receives revenue, but rents it to the public sector to manage and operate so it is done fairly

Question 6

What does nationalisation cause

Answer 6

natural monopolies