To complete unit 3, we have to look at nationalisation and privatisation.
We’ll start with some definitions then examine the advantages and disadvantages of each.
The definition of nationalisation as provided by Merriam Webster is the process of transforming
private assets into public assets by bringing them under the public ownership of a national
government or state.
An example would be the government taking control of an industry such as oil, steel,
rail, banking or air.
In the 1970s the British government nationalised British airlines into British Airways.
The advantages include that the government may be able to lower costs by assuming control
of the industry.
By being the sole owner, the government may be able to exploit economies of scale in production
that may otherwise be unachievable.
Secondly, the companies could be run to achieve a social purpose and serve society in some
way as opposed to focusing on maximising profit.
By operating for the benefit of society, less pressure may exist on earning profits.
Thirdly, the government can assume control of key resources and industries of a country.
In China, the government exerts control over the largest banks in the country.
However, this allows them to manipulate the financial sector in a way that could benefit
the economy.
How well they do that is debatable, but that is a topic for another day.
On the disadvantage side, government firms do not face competition and therefore lack
an incentive to cut costs.
Although they are accountable to the tax payer, the consequences are not the same as for private
firms in competitive industries.
The lack of competition could result in less innovation and development emerging from nationalised
industries.
With little pressure from competition, what need is there to develop new products and
respond to changing consumer needs?
Additionally, the quality of government provided goods and services may not be as high as those
provided by a competitive private sector.
The quantity of goods available may also be restricted, resulting in a reduction of choice
for consumers.
If you’re not sure of this, you’re welcome to research North Korea’s smartphone.
Finally, in democratic countries where political parties can be in power for a few years or
less, industries may be subject to short termism.
As political power changes hands, the direction of nationalised industries may also change.
Privatisation is defined as the transfer of ownership, property or business from the government
to the private sector.
In the late 80s, the UK government then privatised British Airways and floated the stock on the
London Stock Exchange, where private individuals and institutions could purchase shares and
ownership in the company.
As for the advantages of privatisation, competition amongst private businesses can lead to a reduction
in costs.
To maintain profit margins, companies will seek to reduce their operating costs.
Additionally, as was the case with British Airways, once the nationalised industry is
privatised, private individuals and institutions are able to take part ownership.
This allows them to share in the profits generated by these firms.
The competitive landscape for private firms could also give rise to an increase in the
quantity and quality of products available.
Private firms will release new products to keep and gain customers, and in doing so may
increase the quality of output to gain a competitive advantage in the market place.
There is a one-off benefit to the government of the revenue generated from the sale of
nationalised assets.
However, in the future the government will no longer generate revenue from those assets.
Another disadvantage would be the possibility of a private firm obtaining monopoly power.
Without government regulation, the firm could exploit consumers.
Finally, by focusing on profit maximising, firms may have little incentive to serve social
objectives.
Their primary concern will be in generating profit, with less focus on overall social
welfare.
Alright, this wraps up unit 3.
We’re getting through the AS and we’ve finished the microeconomic portion of this
course.
We’ll next move on to unit 4 and the macroeconomy.
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As for now, keep studying and I will see you in the next one!