Gov Intervention

Question 1

Arguments for nationalisation

Answer 1

• lower costs (more productively efficient as economies of scales achieved by merging competing firms into one; especially for natural monopolies)
• control of monopolies (e.g. railway companies/gas suppliers were local monopolists and so now prevented from reducing social benefits by raising prices & lowering output)
• better management (private firms run in amateurish way as managers/owners more interested in enjoying quiet life or short run profit rather than welfare of company and economy)
  maximised net social benefit not private profit (there were significant externalities seen in industries that were nationalised e.g. coal industry where welfare of workers was disregarded for sake of profit)
• greater control of economy (v important if gov needs to manage an unstable market economy)
• a fairer distribution of resources (seize profits made just for owners and use them to benefit everybody in society - both workers and consumers)

Question 2

Arguments for privatisation

Answer 2

• cost (public owned industries have no incentive to cut costs and so X inefficiency present) whereas private industry reduces costs to maximise profit - greater productive efficiency
• choice and quality (private sector firms have incentive to prove those things because of competition or even if monopolist, in order to raise prices and expand market and therefore higher profits - allocative efficacy linked with choice and quality)
• innovation (private sector can earn high profits if they innovate and persuade consumers to buy more of product so increases dynamic efficiency)
• invisible hand (market forces allocate resources so that they are used in most efficient manner)
• reduction in public borrowing and state spending

Question 3

Problems with privatisation

Answer 3

1. Monopoly; some state owned industries operate in a competitive market already and so they would exploit position when privatised
2. Equity; nationalised industries do not price in same way a privatised company would do and so when it is privatised it will lead to change in pricing structure so there will be gainers and losers amongst consumers and also change in equity arising from ownerships of sharers&payouts of dividends to private shareholders
3. Externalities; nationalised industries may have given greater weighing factors such as impact of their operations on the environment than a privatised industry (privatisation= greater negative externalities)

Question 4

Ways gov controls monopoly power

Answer 4

• Price controls or price regulation (min and max prices); max price is equal to marginal social cost of productive thus allocative efficiency in market
• profit controls or profit regulation (no more profit made than if it were perfectly competitive) - this is done in US to control utility companies such as electricity and water
• Quality standards (e.g. post office obligation to deliver letters on daily basis to rural areas and electrical generators forced to have enough capacity to prevent blackouts occurring)/ or lobby hard to water down any quality standards so compliance becomes much less costly
• performance targets (e.g. train times and being late)
• breaking up the monopolist (might be effective for a multi-plant monopolist with large no of plants
• lowering entry barriers
• windfall taxes
• privatisation/nationalisation
• subsidies (allocative efficiency)
• deregulation (removing gov controls)
• self regulation
• merger policies