3.6 Government Intervention Flashcards
Government intervention definition
When the gov interferes with decision making by firms and individuals through regulatory action in an attempt to overcome to market failure
Government intervention to control mergers (CMA role)
E.g. in July 2022 the CMA launched an investigation into the merger of two companies which produce foam used in bedding & cleaning products as they believed it would lead to higher prices & less choice
Competition and Markets Authority (CMA):
- Investigate mergers that result in 25% or more market share
- Prevent uncompetitive outcomes in market
- Aims to prevent firms from exploiting customers in form of high prices, low choice, low quality standards through large market share ownership
- Can block mergers, merger approved if potential benefits greater than costs
Eval - very few mergers investigated each year, CMA suffers from regulatory capture (corruption of authority), may not have all info necessary to make decision
Aims:
Prevent excess pricing- monopolies exploit consumers by charging prices in excess of marginal cost reducing consumer surplus, burdening those on low incomes in particular.
§ To ensure the quantity and quality of provision is high- Monopolies can produce at an output below socially desirable levels restricting consumer choice. Once more, without a competitive drive, the quality of the good or service produced might not meet the demands of the consumer. Regulation can enforce minimum standards for the monopolist.
§ To promote competition by liberalising concentrated markets- This could take the form of privatisation, deregulation or trade liberalisation = encourage more competition and contestability in the market breaking up market dominance.
§ To ensure natural monopolies are regulated- Natural monopolies = industries with very high FC/ huge E.O.S- makes sense for one firm to exploit full E.O.S and supply entire market. Competition = wasteful both in E.O.S. lost but also resources as incumbent will price out new entry. Allowing one firm to dominate an industry freely= dangerous – with monopoly pricing and provision against the interest of consumers = rationale for regulation to promote socially desirable outcomes in a natural monopoly market
§ To promote technological advancement. Monopolies can make large supernormal profits but these profits aren’t always reinvest back- given to shareholders or saved. Regulators- force re-investment of profits if in society’s best interest
Government intervention to control monopolies:
Price regulation:
- on separate card
Profit regulation: ‘rate of return regulation’ = gov decide reasonable level of profit firm should earn given rate of return on capital employed based on comp market (encourages firm to increase capital employed) - aim to encourage investment & prevent high prices, gov may reduce profits through eg. taxation (EVAL - firms wont aim to reduce costs as profit estimate will be lower so little incentive to be efficient, regulators suffer from asymmetric info as need sufficient knowledge of industry, incentive to over employ capital as each machine will increase rate of return regulation and so will increase profit)
Quality standards and performance targets : examples are trains,nhs,gas. ensure firms dont exploit customers by offering poor quality as focus on maximising profits, legislation for firms to meet min standards (post office has to deliver letters on daily basis to all areas, go has to see set number of patients per hour) (EVAL: need strong gov implementation and repercussions if not met eg. fines. Unintended consequences - gp seeing set number of patients may mean they won’t diagnose properly. Companies may ‘game the system’. Train companies may only be allowed set number of delays in a day, may extend journey times longer than they should to prevent delays happening)
set over price, quality, consumer choice, costs of production - helps firm improve service & benefit consumers (eg. certain amount of delays per day for train) (EVAL requires strong political presence & understanding, firms may find ways around it without acc improving)
Taxing monopoly profits (windfall taxes). On diagram it would increase CoP, shifting MC upwards, which will increase prices further than pm and further reduce quantities so will only make monopolies worse, encourages tax evasion and avoidance, monopolist may underreport to avoid paying taxes making policy ineffective. Risk of less innovation and dynamic efficiency
Government intervention to promote competition & contestibilty
- enhancing comp between forms through promotion of small business
- deregulation
- competitive tendering for gov contracts
- privatisation
Government intervention to protect suppliers & employees:
- restrictions on monopsony power of firms
- nationalisation
Governement intervention to control Monopolies :
PRICE REGULATION
Price regulation: intention= cap prices of monopolist at allocatively efficient levels in market= price ceiling. Maximum prices, if set at the competitive price, reducing monopoly pricing and inc quantities= inc social welfare and recover deadweight losses of both CS and PS that existed due to monopoly abuses
Price regulation of any sort encourages firms to find efficiency savings, to cut costs as much as possible in the hope to charge prices at the regulated price but still making a profit as costs have been cut by more than the price inc
i. RPI price regulation– cap price increases by the RPI inflation rate. As prices across the economy rise by RPI, allowing firms to INC prices by the rate of RPI inflation = allow firms to cover their costs and still make profit if they find efficiency savings (cost savings).
ii. RPI-X price regulation. RPI-X is more severe where X represents - given percentage- expected efficiency gains. If RPI is 4% and X is 2%- firms can only increase prices by 2% forcing efficiency savings to be found. If regulators feel monopolies are charging excessively high prices- punish firms by setting a high value of X to protect consumers.
ii. RPI +/-K allows firms to increase prices by enough to fund capital investments whilst still protecting the consumer from excessive prices. K= level of investment. If regulators feel as though enough profit can be made if prices rise less than RPI, K can be negative.
EVAL”
Eval 2:Regulatory bodies may set the level of K and X wrongly- lack perfect information regarding costs and revenue. May be set too high or k too low where firms don’t make enough profit to survive -deciding to shutdown or move production elsewhere. If x is set too small and k too high prices may still be high charged in excess of MC- burdening consumers and reducing CS. As regulation = costly, maintaining existence of reg bodies and both administration and enforcement of regulation = unintended consequences- gov failure- costs of intervention outweigh benefits
§ Eval 3:Regulation = very costly in maintaining existence of regulatory bodies- admin and enforcement= OC – this money could’ve been spent more effectively to fund other policies or areas of economy. Strong argument if regulation causes unintended consequences or not strict to promote socially optimum outcomes
§ Eval 4: Firms may be punished for successfully adapting to the regulation. if firms found efficiency savings of more than X allowing supernormal profits to be made even with RPI-y regulation, regulators may respond by increasing X burdening firms unfairly.
§ Eval 5: Regulatory capture could occur. best regulators = previously worked in industry = know costs and rev structures and balanced regulation to maximise social welfare. However increases risk of managers and CEOs - influencing regulator, whom may have good relationships with, in a way that benefits them as opposed to interests of society= end outcome is a lower value of X or a higher value of K resulting in a slight improvement in resource allocation, but not enough to full solve the inefficiency of monopoly and promote competition due to regulation set that’s purposefully weak. Given very high costs of regulatory bodies= substantial gov failure.
Governement intervention to control Monopolies :
QUALITY CONTROL OR PERFORMANCE TARGETS WITH EVAL
fining monopoly train providers for having more than a certain number of delays a day, forcing gas and electricity providers not to cancel winter supply if a pensioner fails to pay a bill or
imposing time targets for ambulance services =emergency care. targets force a monopolist to meet needs and wants of society providing services at minimum requirements and increasing the quantity of services provided
Evaluation 1) Strict performance targets, such as GPs having to see a certain number of patients in hour = unintended consequences. Shortcuts taken and mistakes made in diagnosis due to GPs rushing meetings.
§ Evaluation 2) Strict performance targets = firms ‘gaming the system’ and finding ways around regulation- train companies, to avoid fines for excessive delays, might lengthen journey times beyond what is true to compensate for any potential delays- heightened regulation = promote behaviour - firms going against intentions of policy.
Governement intervention to control Monopolies :
PROFIT REGULATION OR RATE OF RETURN REGULATION WITH EVAL
regulatory authorities impose a max level of profit that a firm is allowed to make, equalising to acompetitive firm -given the same costs and revenues. The equation used is for
operating costs to be covered adding on a rate of return for all capital machinery employed= force firms to reduce prices to make profits in excess of the permitted level as excessive profits will either be taxed away or regulators will enforce harsher price cuts on the monopolist.
Evaluation 1) Such profit regulation requires regulators to have perfect knowledge of costs and revenues of the monopolist. However - asymmetric information and strong incentive for monopolist to over report costs to increase permitted profit.
§ Evaluation 2) Profit regulation promotes the wrong incentives for a firm who will not control their costs knowing that costs will always be covered by the profit control equation. This encourages wastefulness in production and inefficiency, an unintended consequence of the regulation.
§ Evaluation 3) Profit regulation will incentivise firms to over employ capital even if it is not necessary and not worthwhile investment for firm- more capital employed will increase permitted level of profit that can be made. This is wasteful and an inefficient production decision, an unintended consequence of the regulation.
MONOPOLY POLICIES GENERAL EVALUATION
The assumption that regulators will have perfect information when enacting price regulation and profit regulation for example is flawed- In reality, information regarding monopoly costs and revenue is imperfect with clear information asymmetry= unintended consequences excessively strict regulation could occur with firms shutting down or moving production to another country where regulation is not as severe. If regulation is too lax- may not be the allocatively efficient outcomes desired= costs of the regulation outweighing the benefits and therefore government failure.
REGULATION= COSTLY IN MAINTAING REGULATORY AUTHORITIES AND IN BOTH ADMINISTRATION AND ENFORCEMENT- Tax payers must pay this cost in the hope of benefits via lower prices, better quality and higher quantities produced where social welfare improves in the market. If however these benefits are minimal or do not occur due to the regulation being set incorrectly, regulatory capture or the financial costs being excessively high, government failure = worsening the prior misallocation of resources and reducing social welfare even further.
REGULATORY CAPTURE IS THE BIGGEST CONERN OF MONOPOLY REGULATION GIVEN THAT REGULATORS ARE OFTEN EX INDUSTRY PERSONNEL- The risk of regulators acting too softly on firms because of the influence of industry contacts significantly increases the chance of government failure and regulation not resulting in outcomes that increase social welfare.
THERE ARE SIGNIFICANT ADVANTAGES OF MONOPOLY SUCH AS DYNAMIC EFFICIENCY BENEFITS, EOS EXPLOITATON AND CROSS SUBSIDSATION- If monopolies are engaging in any of these activities there is an argument for lax or no regulation as this is clearly in the public interest, benefitting society significantly. Strict regulation that prevents these benefits occurring would reduce social welfare and could result in government failure = costs of policy outweigh benefits.
IF THE MARKET IS NATURAL MONOPOLY IT MAKES SENSE FOR ONE FIRM. TO SUPPLY THE ENTIRE INDUSTRY- The type of regulation used is important in such a market to ensure that welfare promoting outcomes are attained. Liberalising the market by opening it up to competition would promote a wasteful duplication of resources, allocative inefficiency and lack of the huge economies of scale that a single natural monopoly would be able to exploit, productive inefficiency. Instead a private natural monopoly needs regulation that lowers prices and generates higher quantities at the allocatively efficient level given that natural monopolies often provide essential services for the function of society.
GOVT INTERVENTION TO PROMOTE COMPETIION AN CONTESTABILITY:
PROMOTE SMALL BUSINESSES
The government can give training and grants to new entrepreneurs and encourage small businesses through tax
incentives or subsidies . This will increase competition since there will be more firms within the market, and will offer a chance for more firms to join.
It increases innovation and efficiency , since new firms are likely to provide new products and incumbent firms will no
longer be able to be X-inefficient.
GOVT INTERVENTION TO PROMOTE COMPETIION AN CONTESTABILITY::
DEREGULATION PROS + CONS + EVAL
Camera for graphic- same as privatization one
DEF- the removal of legal barriers to entry improving both actual competition and contestability in the industry.
PROS:
DEREGULATION CAN PROMOTE OUTCOMES LIKE THOSE ATTAINED IN COMPETITIVE MARKET STRUCTURES- Allocative efficiency can be achieved with prices close to or equal to marginal cost. Resources are allocated according to consumer demand with consumers getting what they demand at the quantity they desire. Firms = compete on both price and non-price factors, with high consumer choice and low prices- inc CS in market. Quality of product being sold is excellent -drive to meet the needs and wants of the consumer
DEREGULATION CAN LEAD TO PRODUCTIVE EFFIENCY WHERE PRODUCTION TAKES PLACE AT THE LOWEST POINT ON ITS AVERAGE COST CURVE- all possible E.O.S are being exploited - firms cannot increase output and lower their AC any further. These lower average costs can = lower prices for the consumer increasing their CS. Firms do this to benefit from lower average costs, which = higher levels of supernormal profit over time= increases in MS if E.O.S benefits = lower prices than rivals.
High levels of competition may force dynamic efficiency gain iF profit- reinvest- tech advances, innovative new products and R&D. consumerswill receive brand new, better quality products over time- perhaps able to purchase products that don’t yet exist. Prices could be lowered over time if tech advances reduce costs for businesses- passed on to consumers - choice available to consumers would increase too.
CONS:
Deregulation may not promote competitive outcomes if new firms do not actually enter the industry perhaps due to other barriers to entry in the industry remaining high- Monopoly or oligopoly may form, where incumbent firms use their market power to predatory price, advertise heavily or flood the market with goods or services to establish their dominant position frightening off potential competition. Allocative and productive inefficiency will result with consumers losing out significantly from higher prices and thus lower consumer surplus but also lower quantities, reducing choice.
If the market is a natural monopoly is makes sense for one firm to supply the entire industry, where competition would promote a wasteful duplication of resources- allocative inefficiency and lack of the huge E.O.S that a single natural monopoly would be able to exploit; productive. inefficiency. This is true as long as the natural
monopoly is regulated to produce at allocatively efficient outcomes. Deregulation- promotes competition in natural monopoly market, not in best interests of society, increased prices, decreasing output thus reducing welfare/
Loss making goods and services will not be produced- ed. This is because profit motivated firms will cease production
where losses are made. These goods and services may have generated significant social benefit thus harming social welfare if they are no longer produced. However, if firms in a deregulated industry make enough supernormal profit, they can cross subsidise loss making goods or services that consumers desire allowing production to still take place.
The drive to reduce cots may lead to shortcuts being taken in the production process where the actual quality of output may not be as good and product safety a concern- This is because cost savings might imply poorer customer service and less focus on quality perks which raise the cost of production but also greater risks in
consumption if safety standards are not as tight. This could have a detrimental Impact on consumers but this is unlikely to be the case if competition is strong in a deregulated market. Firms will know that taking shortcuts and excessive risk will only harm their long term market share and so will not do it.
Firms in a deregulated market may not be dynamically efficient- This is because intense competition post deregulation can reduce a firm’s ability to make large supernormal profits thus restricting re investment back into the business. Over time consumers lose out with limited technology advances
EVAL:
The impact of deregulation depends heavily on how many firms actually enter the industry. If non- legal barriers to entry are high or new firms create their own barriers, entry into the market will be restricted with a greater likelihood of local monopoly or oligopoly formation. Governments therefore must deregulate as much as possible to keep entry barriers low to promote the competition drive that is necessary for this policy to work
THERE IS AN IMPORTANT ROLE FOR REGULATION - POST DEREGULATION OF AN INDUSTRY- This is because there may be local monopoly or oligopoly power in the market, which will need competition policy to prevent market abuses.
If this does not exist there is a great risk of social welfare reducing due to deregulation.
There may be consumer inertia that stops consumers switching suppliers. process of switching might be time consuming, complex and costly or consumers might be loyal to a current brand. Consumers might not even be aware of new firms that have entered the market post deregulation. If this is true, there is no guarantee that deregulation and greater competition will actually benefit consumers via lower prices, better quality and greater choice. Competition authorities can help by making it easier for consumers to switch suppliers, providing information about new firms in the market but also by reducing excessive bureaucracy when switching providers.
GOVT INTERVENTION TO PROMOTE COMPETIION AN CONTESTABILITY::
COMPETITIVE TENDERING
gov has to provide certain merit goods and public goods. Sheets in nhs- produced by private sector- private firms employed to run hospitals (PFI)
§ Competition can be introduced into market as gov will request competitive tenders by drawing up a specification for good or service and inviting private firms to bid for the contract to deliver it- firm offering the lowest price wins the contract, subject to quality guarantees.
§ helps minimise costs for GOV - ensures efficiency by allowing for competition- private sector will have more experience running projects- likely they’ll be better managed.
§ However, may not always be most cost-effective way and the process of collecting bids is costly and time- consuming . The private sector may not aim to maximise social welfare in same way gov would and could use cost-cutting methods that reduce quality.
GOVT INTERVENTION TO PROMOTE COMPETIION AN CONTESTABILITY::
PRIVATISATION
CAMERA FOR GRAPH
April 2022 the UK Government confirmed that Channel 4 would be privatised
DEF- when state owned assets are sold to the private sector
PROS- PROMOTES COMP, PROFIT MOTIVE AND GENERATES REVENUE FOR GOV
Privatisation can promote outcomes like those attained in competitive market structures. Allocative efficiency can be achieved with prices close to or equal to marginal cost. Resources are allocated according to consumer demand with consumers getting what they demand at the quantity they desire. Privatised firms can compete significantly on both price and non-price factors, consumer choice = high and prices are low increasing CS in market. Quality of the product being sold is excellent too - drive to meet needs and wants of the consumer.
§ Reduces x-inefficiency – ensures low prices and high quality
Privatisation through sale of state owned assets = generate significant revenue for gov which can then be used to finance key expenditures in economy such as health, education, infrastructure and welfare= strong argument is gov - running budget deficit and has significant national debt. Can reduce public sector net cash requirement
Privattisation through PFI can allow gov to build infrastructure new schools, hospitals and transport when they otherwise wouldn’t have been able to due to running high budget deficits with excessive national debts. Benefits to economy, firms and individuals = better quality infrastructure with gov paying this off this debt in future once project has generated a return via increase tax revenues
profit motive = dynamic efficiency gains if supernormal profits are made in L/R. Such profit = reinvested back into company in the form of tech advances, innovative new products and R&D= beneficial for consumers who will receive brand new, better quality products over time - purchase products that don’t yet exist. Prices could be lower over time if tech advances reduce costs - passed on to consumers. The choice available to consumers would increase too. New product development can create monopoly power, esp if products are patentable and better technology can reduce costs of production increasing the profit making potential of the firm even more over time
CONS:
Privatisation may not promote competitive outcomes if many firms do not actually enter the industry. Monopoly or oligopoly may form with allocative and productive inefficiency the end result. Consumers will lose out significantly from higher prices and thus lower consumer surplus but also lower quantities, reducing choice.
the market = natural monopoly - makes sense for 1 firm to supply entire industry= competition would promote a wasteful duplication of resources, allocative inefficiency and lack of E.O.S that a single natural monopoly can exploit, productive inefficiency. This is true as long as the natural monopoly is regulated to produce at allocatively efficient outcomes. Privatisation, which promotes competition in a natural monopoly market, is not in the best interests of society increasing prices, decreasing output and thus reducing welfare.
Loss making goods and services would no longer be produced. Private firms = profit motivated and will cease production where losses are being made. These goods and services may have generated significant social benefit thus harming social welfare if no longer produced. However, private firms have the ability to cross subsidise loss making goods or services that consumers desire allowing production to still take place. They can use supernormal profit being generated from a successful product to subsidise losses of another product.
Privatisation can lead to a misallocation of resources and thus market failure due to under or over production. This is because private firms will ignore and external costs and benefits in production and will thus produce more or less units than socially desirable. In the case of positive externalities, consumers do not benefit from increased quantity and choice given under production issues and where there are negative externalities, society suffers from the over- production; units that generate more cost than benefit.
Privatisation through PFI can increase government debt substantially over time. GOV must pay maintenance costs of infrastructure, leasing costs and interest for a large period of time - costs far exceed costs of construction for private firm= future generations will have to bear the burden of this debt through higher taxes or cuts to key public services
EVAL:
The impact of privatisation depends on how many firms actually enter the industry. If BTE = high – legal barriers or new firms creating own barriers- entry into market= restricted with greater change of monopoly or oligopoly. Gov = strongly deregulate to keep entry barriers low to promote comp necessary for privatisation to Work
The form of privatisation used will determine whether privatisation generates revenue or costs to gov or cost. If a PFI or contracting out of services approach is used, the cost to GOV may be higher than if left to the state sector, burdening future tax payers: however if selling state assets to the private sector- could generate substantial income as long as gov has priced the sale correctly. If not, revenues will be lower - creating a sig OC where certain public services will not receive the full funding they could have
There’s an important role for regulation post privatisation of an industry- there may be monopoly or oligopoly power in market- need competition policy to prevent market abuses, but also if market would fail under private hands due to existence of externalities in production, policy might be needed to bring quantity to social optimum. If this doesn’t exist there’s risk of social welfare reducing under privatisation.
The size of newly privatised firms - important to evaluate whether privatisation will result in EOS benefits or losses. Under state control with one large company supplying the entire market, E.O.S exploitation = significant. If privatisation increases competition between lots of small firms, these benefits will be lost reducing productive efficiency leading to higher prices for the consumer.
What are the different Forms of privatisation?
The sale of state-owned assets to private sector corporations or individuals- flotation /(selling shares) on stock private meetings with buyers.
Government - contract out services to private sector where gov controls and monitors output or service quality but jobs themselves - carried out by private firms= contracting out cleaning services for hospitals in the Uk.
A competitive tendering process can occur where private firms bid to build a project for the government. The winning bid = lowest cost and highest quality matching the requirements and standards of the government.
A public private partnership (PPP) could occur where the government works alongside private sector firms to
complete an infrastructure project. A private finance initiative (PFI) is a common example of a PPP
where private firms will pay for all the construction costs of a project, for example a hospital, road or bridge and then
lease it out to the gov - annual payments are made to private firm with interest, usually between 25-35 years. Maintenance costs are also paid by the government. This allows the government to go ahead with key infrastructure projects even if finance is not currently available.
Gov intervention to protect suppliers and employees:
NATIONALISATION
DEF- Process of taking an industry into public ownership
PROS:
Public sector firms may benefit from larger economies of scale. public sector firms are often natural monopoly providers with extremely high fixed costs. These firms will benefit from lower average costs compared to smaller private firms hence are likely to be more productively efficiently. Furthermore, allowing many private firms to provide such services will lead to a wasteful duplication resources and thus allocative inefficiency.
Public sector firms are more concerned with service provision. public sector firms work for the benefit of society = more likely to meet needs and wants of the public to max social welfare. Consequently more likely to be allocative efficient with resources following consumer demand where prices are low and quantity of provision is high- gov consider externalities
Market failures arising from negative externalities/positive externalities are less likely with public sector
the role of the public sector is to allocate resources where society desires, hence these firms will be more likely to take externalities into account in planning and construction= allocative efficiency, with no over/under production as resources will be allocated at the socially optimum level of output - any misallocation of resources will be avoided
The public sector can be a vehicle for macro-economic control. the greater the role of the public sector in the economy, the greater the number of public sector workers. Consequently when inflation is running high, gov can counter this by restraining public sector pay increases. Also governments can alter the level of employment to correspond with different stages of the economic cycle.
CONS:
Public sector firms lack the incentive to minimise costs.- lack of competitive pressure and lack of profit motive. Therefore firms unlikely to operate at minimum point of their AC curve (unlikely to reach their MES) thus they voluntarily forgo E.O.S and are not productively efficient leading to higher prices and lower CS for consumers.
§ Public sector firms may suffer from diseconomies of scale. Sole provider in the market, public sector firms may become too large allowing for inefficiencies in the production process to creep in. The firm will suffer from higher average costs as it expands thus will be productively inefficient leading to higher prices and lower CS
§ Public sector firms may be complacent and wasteful in production. a lack of competitive pressure and lack of a profit motive. Consequently, production may take place above the AC curve resulting in X-inefficiency and firms having to rely on subsidies= costly, and wasteful use of taxpayer’s money.
§ Prices may be lower and CS greater with private sector involvement- competitive pressure and a significant profit motive hence firms will strive to be as efficient as possible, lowers costs to remain competitive. Allocative efficiency may be achieved with resources following consumer demand and productive efficiency achieved too with full E.O.S exploitation.
§ There is a lack of supernormal profit made in the public sector. This is because the objective of public sector firms is to satisfy the public with low prices and high output. Dynamic efficiency is unlikely to occur implying less innovation and improvements in technology keeping costs and prices higher in the L/R
§ Public sector provision is extremely expensive and funded through the taxpayer. There is a large OC - money could have been best used elsewhere where more benefit could have been derived e.g. in promoting education to reduce structural u/e or to help a manufacturing base to re-balance and diversify the economy.
§ There is a greater risk of moral hazard with public sector involvement. Politics or gov employed managers aren’t directly accountable for action- take sig risk- inc change of faiure- burden on taxpayer . Nationalised industries suffer from the principal-agent problem and moral hazard, as managers know that any loss they make will be covered by the government.
§ Political priorities can override commercial issues on capital projects- politicians as elected rep have vote max as main obj- the construction of key capital proh don’t go ahead to protect politicians from losing popularity- if they fail even if such projects are in L/T interest. Key investments may not take place – quality and quantity of infrastructure poor in economy and competitiveness lower.
EVAL:
Despite nationalisation being very expensive, it can be argued that the delivery of key public senices provides more benefit than costs especially if the service would be under produced in the private sector as it is a merit good or not supplied at all due to it being a public good or it generating a loss for profit motivated private firms. Once more, the delivery of such services can create economic growth and generate a return to the gov via higher tax revenues over time
The size of nationalised vs privatised firms is important to evaluate whether nationalisation will result in. With one large state company supplying the entire market, E.O.S exploitation = significant. If private firms - smaller and unable to exploit the same E.O.S - argument for
nationalisation is strong. However if nationalised firm becomes too big and suffers from D.E.O.S it could be argued that smaller, productively efficient private firms would promote better outcomes for society.
If regulation of private firms is strict or the level of competition in the private sector is strong, nationalisation my promote greater inefficiency- y and costs to society than benefits. Given that nationalisation is highly expensive too, allowing the private sector to supply the industry at socially desirable levels either due to
regulation or natural competition would be in the public interest. This argument breaks down only if there is
significant market failure in the private sector.
Public private partnerships might be a better long term solution to maximise social welfare where resources are allocated at socially optimum levels with low prices due to government monitoring and control. Dynamic efficiency benefits will occur too due to the efficiency and profit motivated drive of private businesses
