A4 privatization and regulation
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A4 Privatization and regulation. David Begg, Stanley Fischer and Rudiger Dornbusch, Economics , 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith. Nationalization and privatization. Nationalization the acquisition of private companies by the public sector

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A4 Privatization and regulation

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A4 privatization and regulation

A4Privatization and regulation

David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,

6th Edition, McGraw-Hill, 2000

Power Point presentation by Peter Smith


Nationalization and privatization

Nationalization and privatization

  • Nationalization

    • the acquisition of private companies by the public sector

  • Privatization

    • the return of state enterprises to private ownership and control


Natural monopoly

The monopoly would produce

where MC=MR, with output

Qm and price Pm.

The firm makes profits

as shown.

Pm

From society's point of

view the optimum position

is at PcQ',

where MSB = MC.

Pc

Q'

Qm

Natural monopoly

occurs when there is an industry with such economies of scale

relative to market demand that only one firm can survive.

Price

LAC

LMC

DD

MR

but the monopoly would make

a loss if forced to produce at

this point, with LAC > AR.

Quantity


Natural monopoly 2

(1) Average cost pricing:

Firm sets P=LAC at point G;

deadweight loss reduced

to GHE.

(2) Two-part tariff:

Firm makes a fixed charge

to cover the loss made by

producing at Q' (the pink

rectangle), and a variable

charge related to marginal

cost.

G

Pc

H

Q'

Natural monopoly (2)

Alternative pricing policies:

Price

LAC

LMC

E

DD

MR

Quantity


Nationalization

Nationalization

  • Another possibility is to nationalize the industry and provide a subsidy to cover the loss

    • as was popular in Europe in 1945-80

  • If nationalized industries make losses, this does not prove they are failing to minimize costs or produce at the socially efficient output

    • but incentives may be a problem.


Reasons for nationalization

Reasons for nationalization

  • Natural monopoly

  • Externalities

    • e.g. subsidizing public transport (London Underground) may be a second-best option to road pricing.

  • Equity or distributional consequences

    • e.g. protecting transport in rural areas

  • Co-ordinating a network

    • e.g. British Rail could have an overview of the whole rail system


Reasons for privatization

Reasons for privatization

  • Improve incentives for production efficiency

    • makes managers accountable to shareholders.

    • but sheltered monopolies will be sleepy no matter who owns them

    • so privatization will be most successful where there is potential for competition.

  • Pre-commitment by government not to interfere for political reasons


Privatization in practice

Privatization in practice

  • At 1997 prices, almost ┬ú67billion was raised in revenue from privatization in 1980-97.

  • In terms of widening share ownership, effects were limited

  • The Private Finance Initiative (PFI) is claimed as an innovative way of drawing on private-sector expertise to finance and manage public projects such as roads and hospitals.


Regulation

Regulation

  • Privatization does not remove the need for regulation

  • In the UK, regulation has been through price-capping

    • privatized industries are not permitted to raise prices beyond RPI-X

      • I.e. real prices must fall.

  • Regulatory capture occurs when the regulating body comes to identify with the interests of the firm it regulates

    • eventually becoming its champion rather than its watchdog.


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