Privatisation content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class. Subtopics Intro to Privatisation Limitations of Privatisation

1. Privatisation
Upper 6th Micro
Government Intervention
(U6th)

2. Intro to
Privatisation
Privatisation
Mr O’Grady

3. Privatisation
Definition: The sale of state-owned businesses to the private sector
Aim of Privatisation: To open firms up to market discipline by:
1. Creating a profit motive
2. Implementing an ownership structure that has directors monitored by shareholders
(corporate discipline), who hold them to account at the AGM
Notable examples: BT, British Gas, Royal Mail, British Airways
Advantages of privatisation:
Dynamic Efficiency: Incentive to cut costs in order to
maximise profits improves efficiency
This could reduce consumer prices too!
Innovation: Incentive to firm to innovate new
products or new processes
Variety: incentive for firms to offer more choice and
improve quality to attract customers
Gov. revenue: Privatisation can raise billions of
pounds through the sale of assets
This can fund government spending or tax cuts
Quantity
C/R
MCState-owned
D = AR
MR
QPrivate
pState
pPrivate
MCPrivate
*Constant MC assumed for
simplicity*
QState

4. Disadvantages of Privatisation
Change of firm’s objective: Public monopolies
simply become private monopolies, but with a
profit motive!
If there are no efficiency gains, price will rise and
consumers suffer as firm’s objectives change from
welfare max. (Allocatively efficient, P = MC) to profit
max (MR = MC)
Falling investment and job cuts are also possible as
private firm seeks to maximise profits
Quantity
C/R
AC
MC
D = AR
MR
QPM
pPM
pWM
QWM
Equity issues (fairness): would a private firm treat all consumers the fairly?
A private business is free to serve the highest bidder and has no obligation to provide for all members of
society
Negative externalities: less focus on society welfare over private welfare
A private business has profits, rather than society’s welfare at its core

5. Limitations of
Privatisation
Privatisation
Mr O’Grady

6. Limitations of Privatisation
Needs robust regulation
Limited liability allows private investors to leave markets, leaving the public without a core
service
Need to ensure privatisation doesn’t just enrich a few rich insiders
Assets should be sold through IPOs (Initial Public Offering) or competitive tenders to get the
best price
Otherwise government revenues may not be maximised
Effectiveness depends upon current efficiency level
If the business was highly efficient when owned by the public, there will be limited cost
savings and benefits to pass on to consumers
Effectiveness depends upon nature of the business
If the state owned enterprise had already faced limited competition when part of the public
sector, transfer of ownership merely replaces a public sector monopoly with a private sector
one that now requires regulation

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