Privatisation
Learn why privatisation may increase efficiency
Definition: Privatisation is the transfer of ownership of a firm/industry from the public sector to the private sector.
Why would the government want to transfer ownership of its firms/industries to the private sector?
The government’s primary objective is to maximise the welfare of society
Publicly owned firms can provide goods at lower cost to the consumer and higher output levels as profits do not need to be made
Publicly owned firms are funded by taxpayer money
However, publicly owned firms DO NOT have SHAREHOLDERS
Also, publicly owned firms DO NOT make PROFIT
NO PROFIT + NO SHAREHOLDERS = NO INCENTIVE!
Production costs can be more expensive and this can be deemed a waste of economic resources and taxpayer money.
When publicly owned firms transfer to the private sector, it CREATES COMPETITION.
SOME EXAMPLES
Royal Mail - privatised through sale of shares
Government contracts e.g. government paying a cleaning to clean its buildings
Competitive tendering - when private firms bid on a job that the government wants completed on its behalf e.g. to build a road
Public Private Partnerships (PPPs) - when a private firm works with the government to build something or provide a service to the public
Some hospitals in the UK are built by private firms and the government leases from said firms
So, governments save on the startup costs involved of building the hospital, and instead pays an agreed rental fee (this is an example of a PFI, a Private Finance Initiative)
ADVANTAGES
Increases competition in the industry
The privatisation of firms increases competition within the industry. As long as the firm isn’t already a monopoly, allocation of resources may improve.
Increases efficiency of resource use
Private firms do better with the scarce resources they have. They are motivated by profit so productivity and output levels are important to a firm.
Decreases average costs (lowers x-inefficiency)
Firms can cut the organisation slack out of a business in order to save money and make more profit. X-inefficiency is particularly a problem for very large businesses.
Could decrease taxes in the short run
Governments spend less on large-scale projects in the case of PFIs. So in the short run, the government saves some money and can still provide the service.
Large projects still go ahead
Some projects can actually go ahead because of PPPs (because the governments may not have had the money to invest in these projects in the first place)
Governments gain revenue
Government gains revenue in the short run from selling off its companies
DISADVANTAGES
Firms may grow too large
Firms are in direct competition with consumers for welfare (firms want prices higher, consumers want prices lower). If firms get too large, then social welfare may decrease (a monopoly problem). The government’s primary objective is social welfare maximisation, so publicly owned companies may put society’s needs first and foremost.
Firms may prioritise profit above all other objectives
Firms can become more efficient by trying to make more profit. However, in doing so, they may cut costs which decrease quality or safety of a product. E.g. building a house - firms may decide to save on costs and use lower quality production methods.
Privatised firms will need a regulator
It’s likely the government will have to organise a regulator to regulate the firm/industry. A regulator ensures that the private firms do not operate against society’s interests. However, regulation costs money.
Governments may end up paying more to PFIs
Governments pay rental fees to owners of buildings. The government will quite possibly end up paying more in rental fees over time. This will cost the taxpayer money and adds to government debt
In summary, we have learned:
Definition of privatisation
Why privatisation may be successful
Why privatisation may not be successful
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