Unit 3 Public vs Private provision
Terms in this set (26)
What is the first argument for nationalisation?
-could be more PRODUCTIVELY EFFICIENT than firms in the private sector
-with the merging of the rail companies in 1947 it was argued that economies of scale could be achieved
-this argument relies upon the fact that industries which were nationalised were natural monopolies
What is the second argument for nationalisation?
-seen as a chance to appoint efficient modern management which would run the industries to maximise net social benefit
What is the third a argument for nationalisation
CONTROL OF MONOPOLIES
-seen as easiest and most effective way of controlling these monopolies and preventing them from reducing social benefit by raining prices and lowering output
What is the fourth?
GREATER CONTROL OF THE ECONOMY
-state ownership was seen as essential if the government was to manage an unstable market economy
-rolls Royce went bankrupt and the state had to intervene to prevent free market forces from destroying companies
What is the fifth?
FAIRER DISTRIBUTION OF INCOME
-capitalist profit by private firms was seen as expropriation of money which had been earned by the workers
-nationalisation was an opportunity to seize those profits and use them for the benefit of everybody
What does privatisation involve?
1. The sale of large nationalism industries to the private sector
2. Sales of parts of nationalised companies to the private sector
3. Sales of individual assets of government bodies
4. The creation of private sector competition to state monopolies
What is the first argument in favour of privatisation?
-publicly owned industries are likely to have no incentive to cut costs
-the result is likely to be x inefficiency in the industry
-a privatised profit maximising industry does have an incentive to reduce cost as it translates into higher profits
-likely to lead to greater productive efficiency
What is the second argument in favour of privatisation?
CHOICE AND QUALITY
-private sector firms have an incentive to provide both choice and quality
-if they are in a competitive market, then a failure to provide choice and quality will result in consumers buying from firms which do
-choice and quality are aspects of allocative efficiency
What is the third argument in favour for privatisation
-private sector organisations can earn higher profits if they innovate and persuade consumers to buy more of their product
-this increases dynamic efficiency
What is the final argument for privatisation?
REDUCTION IN PUBLIC BORROWING AND STATE SPENDING
- SHORT TERM sale of state owned assets to raise money for the govt which can be used to reduce public borrowing for the year or even pay off part of the national debt
-LONG TERM state owned enterprises make losses and need to be subsidised. Less borrowing leads to lower interest rate repayments and less need for taxes
What is the first problem with privatised companies?
-some were privatised as monopolies and remain monopolies and exploit that position by charging high prices and restricting output, leading to a loss of allocative efficiency
What is the second problem with privatisation?
-process of privatisation is likely to lead to a change in the pricing structure
-this will result in there being gainers and losers amongst consumers
-there will also be a change in equity arising from ownership of shares and payouts of dividends to private shareholders
What is the first way to control privatised industries?
THE CREATION OF COMPETITION
-first is to privatise the company or industry as a whole, but encourage other private sector companies to set up in the industry
-second way is to split the industry up into competing companies at the point of privatisation
What is the second way to control privatised industries?
REGULATION OF THE INDUSTRY
-to create a regulatory framework which prevents it from earning abnormal profit and creating allocative efficiency
What are the three main issues of regulation?
1. In the UK regulation has focused on prices and have been set price limits but allowed to earn as much profit as they want. If the firm cuts costs and becomes more allocatively efficient the it can retain the gains of higher profits
2. REGULATORY CAPTURE it is argued that regulators private companies can be captured, if the regulator assumes that the company is giving it full and impartial information is said to have been captured
3. Concerns the quality of service and investment, issues of allocative and dynamic efficiency
How can de-regulation occur in the markets?
1. Govt may allow private firms to compete in a market which being supplied by a state monopoly
2. Government may lift regulations which prevent between firms
3. Govt may lift regulation when an industry is privatised
What is advantages of de-regulation?
-Lower costs will lead to greater productive efficiency whilst reducing prices and increasing output can lead to allocative efficiency
What is the drawback of deregulation?
-it encourages 'creaming' of markets
-for example the bus services concentrated on providing bus services on profitable urban routes into town centres and arguably to the detriment of country passengers
What is contracting out?
-where the govt employs private firms to operate everything
-this is likely to be accompanied with competitive tendering
-the govt then draws up a specification for the good or service and then invited private sector firms to bid for the contract to deliver it
-the firm offering the lowest price, subject to quality agreements, wins
What is the advantage of contracting out?
-the govt saves money
-competition forces down prices and therefore leading to greater productive efficiency
-the govt doesn't have to worry about how the service will be provided
What are the drawbacks of contracting out?
-providers might fail to meet the specifications of the contract
-concern that only a small number of firms will bid for it
-the danger of collusion
-lower costs can only be achieved because private firms pay their workers less
What is Public Private partnership?
-a range of partnerships between the public and private sector where the public sector and private sector companies collaborate to deliver services
What is the most common of PPP?
PRIVATE FINANCE INITIATIVE
-where a private sector company builds and maintains a piece of infrastructure like a school
-the govt then leases this facility back from the pirate sector on a long lease
-for the private sector firm the contract represents a guaranteed stream of income
What are the possible advantages of PFI for the public sector?
1. Private sector partners should have expertise in building and running a project which will deliver higher quality and lower cost
2. Govt is free to discus on its requirements
3. Innovative solutions
4. Less govt borrowing is required so govt can spend more in infrastructure projects now
How has the PFI not always been successful?
1. Public sector has negotiated deals which give the private sector far too large a profit
2. The level of service provided can be inadequate
3. Companies pay higher rates of interest because they are less secure so any borrowing by the private sector to fund a PFI project will be more expensive than the govt borrowing
What are internal markets?
-where parts of an organisation such as the national health service or BBC compete against each other to provide services
-if a provider wins more contacts than before, money will flow into the provider and it can expand
-providers will be forced to become more efficient or face going out of business