1.8.8a Public ownership and privatisation (A-level only)

Privatisation and Public Ownership Each Have Arguments for and Against

1. Privatisation transfers assets from the public to the private sector.
2. Nationalisation, or public ownership, is the reverse.
3. Each has arguments for and against it.

The Arguments for and Against Privatisation

1. For: profit incentives and competition can sharpen efficiency and cut waste.
2. For: the sale raises revenue for the government.
3. Against: without competition it may simply create a private monopoly, so regulation is often needed after the sale.

The Arguments for and Against Public Ownership

1. For: public ownership can capture economies of scale and pursue social goals such as universal service.
2. For: it can prevent a private monopoly exploiting consumers.
3. Against: without the profit motive it may lack cost discipline and run inefficiently.
4. Against: it can suffer political interference and soft budget constraints.

The Outcome Depends on Competition and Regulation

1. Privatisation only helps if genuine competition follows.
2. Selling a monopoly without competition just moves it to private hands.
3. So the effect on efficiency and prices depends on contestability and effective regulation.

Judge Privatisation by Whether Competition Follows the Sale

UK Privatisation in Practice: Regulators and Price Caps

1. British Telecom (1984), British Gas (1986), the regional water companies (1989) and the electricity industry were sold in the 1980s, followed by Royal Mail in 2013.
2. Because these were natural monopolies, the government created industry regulators, Ofgem (energy), Ofwat (water), Ofcom (communications) and the Office of Rail and Road, to cap prices and set service standards in place of competition.
3. Their main tool is RPI minus X price-cap regulation, which forces the firm to cut its real price by $X\%$ a year while letting it keep any efficiency savings beyond that target until the next price review.

1.8.8b Regulation, deregulation and regulatory capture (A-level only)

Regulation, Deregulation and Regulatory Capture All Shape Market Outcomes

1. Regulation imposes rules on firms, such as price, quality or safety standards.
2. Deregulation removes such rules to increase competition.
3. Regulatory capture is when a regulator serves the firms, not consumers.

Regulation and Deregulation Each Cut Both Ways

1. For regulation: it can curb a monopolist's prices and protect quality and safety.
2. Against regulation: it adds enforcement and compliance costs and can be captured.
3. For deregulation: it opens a market to new entrants and can boost competition and efficiency.
4. Against deregulation: it may reduce standards or safety and let dominant firms exploit consumers.

Regulation Is Not Costless and Can Be Captured

1. Enforcement and gathering information cost money.
2. Regulators may be misled by the firms they oversee.
3. Under capture, the rules can end up serving producers, not consumers.

Weigh the Gains Against Costs and Flag the Risk of Capture

UK Examples of Deregulation and a Worked Cost of Capture

1. The 1986 "Big Bang" deregulated the London Stock Exchange, and bus deregulation the same year removed route licensing outside London so operators could compete freely on any route.
2. The 2008 financial crisis is a classic case for the against-deregulation argument: light-touch regulation of bank capital and lending standards let excessive risk-taking build up, so regulation was tightened afterwards through bodies such as the Financial Conduct Authority and the Prudential Regulation Authority.
3. Ofgem's energy price cap is a useful illustration of capture risk in practice, since it is set using cost estimates partly supplied by the energy suppliers it regulates.