Nationalisation vs Privatisation (Water Industry in the UK)

Question 1

Definitions of both

Answer 1

Nationalisation is the transfer of ownership of a privately owned enterprise into the public sector

Privatisation is the transfer of ownership of a publicly owned enterprise into the private sector

Question 2

Nationalisation KAA

Answer 2

Signpost: Allocative efficiency
-Due to emphasis on consumer welfare, there is a change in objective from profit max to allocative efficiency

-Water industry is essentially a natural monopoly
-One single dominant firm could result in much better exploitation of internal economies of scale due to the very high fixed costs
-As a result, prices for consumers could reduce, increasing Consumer surplus
-There is also likely to be more price stability in a nationalised firm than a privatised firm due to a lower incentive to undercut other firms
-Could also help correct market failures such as environmental damage involved in the supply of water to large amounts of people

Question 3

Nationalisation EVAL

Answer 3

Signpost: Risk of government failure
-Very high costs involved in the running and maintenance of such a large company such as a water supplier
-And also due to the lack of competition or profit motive involved, there could be X-Inefficiency
-Due to the bureaucracy and red tape involved, there could also be excessive administration costs
-Lack of profit incentive reduces the incentive for investment into R&D, dynamic inefficiency
-In addition subject to political understanding, could be distorted by political goals: measures used to gain supporters instead of improving the provision of water

Question 4

Privatisation KAA

Answer 4

Signpost: Dynamic efficiency benefit
-High amounts of competition-increased incentive to reduce costs
-Reduction in X and productive inefficiency
-SNP can be reinvested into R&D such as better water bottles and water cleaning systems
-Price competition could lead to lower prices for consumers, increased CS

Question 5

Privatisation EVAL

Answer 5

Signpost:MARKET FAILURE
-Profit motive instead of consumer interest
-Due to the price inelastic nature of water, firms are less incentivised to reduce prices as there’ll be a proportionately more of a reduction in revenue
-Firms like Evian and Buxton could overspend on advertising, leading to a misallocation of resources as more could’ve been spent on innovating more cost-effective measures to increase supply