Arguments for and against privatisation

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  • Created by: Jade
  • Created on: 17-11-12 20:08
What is privatisation?
Privatisation is the process by which a state-owned organisation or activity is sold off to the private sector
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What is nationalisation?
Nationalisation is the transfer of ownership of a firm from the private to public sector.
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What are the three forms that privatisation can take?
1. Outright sale to another company. 2. Management and/or employee buyout. 3. Public sale of shares in a new company
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Explain the natural monopoly argument against privatisation?
In the case of (say) railways - fixed costs are a very high percentage of total costs. As output increases, average costs will fall, offering the prospect of substantial benefits to be gained from economies of scale.
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Explain why transport is an essential service (argument against privatisation)?
Transport is fundamental to economic and social well-being - it was argued that it should not be left to the private sector to provide and that a degree of central public control was necessary to develop a meaningful transport policy.
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Explain why the large external benefits of transport is an argument against privatisation
The transport system produces large external benefits that may not be taken into account by private sector providers when taking decisions
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The lack of what? was an argument against privatisation
The lack of empirical evidence to support privatisation - this was a particular issue in the privatisation of railways.
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Why may privatisation NOT have an effect on competition?
Private monopolies will replace public sector monopolies and some profits that are earned will go back to shareholders.
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Why are the benefits of privatisation only short term?
The longer term problem is that once privatised there is the issue of having sold off the 'family silver' with wider implications
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Unlike nationalised industries, private sector firms ignore what?
Private sector firms ignore significant externalities generated by transport. Therefore their pricing/output decisions result in market failure.
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Why is the net welfare effect, in private firms, uncertain?
Welfare gains may be transferred to shareholders in higher profits, or consumers in lower prices.
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Why do privatised transport organisations have conflicting stakeholder objectives?
Do they act to maximise profits, performance or safety? E.g. Network Rail
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Benefits of privatisation. Privatisation would allow businesses to focus more on long-term planning and less on what?
Meeting short-term political requirements.
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Public sector transport services are inefficient. Private sector organisations are more?
Efficient and likely to operate where P=MC. Cross subsidisation would be eliminated under private sector ownership.
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Private sector management would be more motivated and have a greater emphasis on what?
Customer service provision
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Privatisation would provide a new source of investment funding for transport as public sector borrowing was?
limited, particularly in relation to other demands placed upon the Exchequer.
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How can privatisation result in lower unit costs?
Efficient private sector firms now have the profit that encourage technical efficiency (assets in private hands have higher productivity). Lower unit costs shift the average cost curve down and are passed on in lower prices.
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Losses turn into?
Profits and a reduced government subsidy is needed which allows public expenditure elsewhere e.g. education
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Explain the contestable market argument in relation to privatisation?
Privatisation introduces competition. Any route generating abnormal profits will attract new entrants until profits become normal.
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Political context - what government was determined to shrink the size and influence of the public sector?
Conservative governments of 1979-1997
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For what reasons?
They believed that if the private sector could provide services such as transport, they should be allowed to so for the benefits of privatisation. Level of subsidy to rail and bus services increasing, privatisation - cut back on this.
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What are the arguments for nationalisation?
Advocates argue natural monopolies are best owned and run by state control to avoid abuse of market power. Transport is a strategic industry best coordinated by government and take account of external benefits.
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What are the arguments against nationalisation?
Privatised natural monopolies can be regulated to avoid abuse of market power. Overall transport strategy can be coordinated by the state. Subsidies can be used to ensure private sector firms maintain socially necessary services.
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State run organisations have no incentive to be?
Productively efficient
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What were the objectives proposed by the New Opportunities White Paper 1992 for rail privatisation?
To see better use made of the railways. To provide greater responsiveness to the customer. To see a higher quality service. To give better value for money to rail users. To generate new capital investment.
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Separation of infrastructure from operations. What company?
Railtrack, track authority, was privatised in 1996. It is now called Network Rail and is effectively back in public ownership.
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Franchising of passenger services, 23 in all. Explain
Most franchises receive a subsidy.
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Outright sale of freight services...
Initially to EWS and Freightliner
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Opportunity for what type of companies to compete for passenger and freight services?
'Open access' companies.
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Control of track charges by an independent regulator?
Control of franchise bidding prices - now DfT.
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Transfer of rolling stock to ...
ROSCOs (rolling stock companies, subsequently privatised)
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Other cards in this set

Card 2

Front

What is nationalisation?

Back

Nationalisation is the transfer of ownership of a firm from the private to public sector.

Card 3

Front

What are the three forms that privatisation can take?

Back

Preview of the front of card 3

Card 4

Front

Explain the natural monopoly argument against privatisation?

Back

Preview of the front of card 4

Card 5

Front

Explain why transport is an essential service (argument against privatisation)?

Back

Preview of the front of card 5
View more cards

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