Privatisation

Question 1

What is Privatisation

Answer 1

The transfer of ownership of assets / businesses from the state
(public) sector to the private sector. It can be ‘partial’ or full.

Forms of privatisation include:
• Contracting out/outsourcing
• Public Private Partnerships (PPPs)
• Private Finance Initiative (PFI)
• Competitive tendering

Question 2

Advantages of Privatisation?

Answer 2

• Profit motive can lead to improved efficiency and more focus on
consumer needs, which supports long-term growth

• Can lead to greater competition and in turn innovation

• Potential for lower prices, higher quality and more choice for consumers

• Potential for less bureaucracy

• Investment decisions are market-led

• May disperse share ownership; businesses have to deliver shareholder value

• Short term boost to government finances

• May create firms that can become global competitors

Question 3

Disadvantages of Privatisation?

Answer 3

• Government can lose an important revenue source

• May lead to privatised natural monopolies which struggle to survive

• Risk of private monopolies exploiting consumers, and needing
(expensive and often ineffectual) regulation

• May be a short-term focus because shareholders are focused on
dividends

• Essential public services should arguably not be run for profit

• Externalities may be ignored in decision-making

• May be unclear whether objective is more competition or more profit

Question 4

What is Deregulation?

Answer 4

Reducing or removing government-imposed restrictions and regulations on businesses, with the aim of promoting competition, efficiency, and innovation.

Question 5

What are some advantages of deregulation?

Answer 5

• increased competition

• lower prices & better services for
consumers

• improved allocative efficiency

• more innovation

• improved dynamic efficiency

• more economic growth

• increased capital investment

• new jobs

• improved long run aggregate supply (LRAS)

• greater consumer choice

• new companies can enter the market and existing companies can expand their offerings

• contestability can lead to an improvement in economic welfare

Question 6

What are some disadvantages of deregulation?

Answer 6

• Reduced safety and
quality as companies may prioritise
profits

• increased inequality

• large companies may dominate the market and small businesses may struggle to compete

• reduced consumer protection;

• environmental costs

• negative externalities such as pollution and social problems, such
as job losses, as companies may not be held accountable for their actions.

Question 7

State ownership v Private ownership…

Answer 7

• Ownership of a business (state or private) is probably less significant than the extent to which an industry is genuinely contestable

• Quality of regulation is also important – a regulator can act as a surrogate consumer

• Distinguish between network (natural monopoly) and final mile service (can be more
competitive) e.g. water & telecoms

• Try not to assume that the private sector is always more efficient & innovative than
the state