Nationalisation is the transfer of key industries from private to state control aimed at reducing market power and ensuring consumer welfare by eliminating profit motives. While it can lead to allocative efficiency and reduced moral hazard, it also risks x-inefficiency, limited innovation, and high government costs. The success of nationalisation depends on public support, acquisition costs, and the efficiency of the existing business.

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

2. Intro to
Nationalisation
Nationalisation
Mr O’Grady

3. Nationalisation
Nationalisation: The transfer of a major branch of industry or commerce from
private to state ownership or control.
Aim of Nationalisation: To remove firms’ market power to exploit consumers by:
1. Removing shareholders and their profit motive
2. Taking control of and subsidising natural monopolies
Notable examples: RBS, Student Loan Company, Network Rail
Advantages of Nationalisation:
Allocative Efficiency: Ensures a price which
optimises welfare
Especially for natural monopolies, as they have low
incentive to fight x-inefficiency as they are not threatened
Positive externalities: Gov can ensure that social
optimal quantities are produced
Reduced Moral Hazard: Less incentive for a state
owned firm to take big risks
Particularly true after the Great Financial Crisis Quantity
C/R
AR
MR
MC
AC
QPrivate
pPrivate
pState
QState

4. Disadvantages of Nationalisation
X-inefficiency: State owned firms don’t care about their profitability
May let their costs rise as X-inefficiency creeps in
Government spending: Expensive for the government to purchase an existing business,
particularly one which is a large monopoly!
Furthermore, in order to reach P=MC and maximise welfare, the government may have to cover the firm’s
subnormal profits if it is a natural monopoly
However: the government can limit the expense of nationalising industries with a forced acquisition at a
low price (or even no price), but this unleashes a whole world of other issues
Variety: In attempting to provide a good for as wide a section of the population as possible,
the level of quality or variety in the products offered may fall, leaving some consumers
disappointed
Innovation: As nationalised firms do not seek to generate SNP, they may not be able to fund
their own R&D.
This can limit future welfare gains
However: the government may decide to give the nationalised firm additional funding to pursue
innovations that are good for society’s welfare

5. Limitations of
Nationalisation
Nationalisation
Mr O’Grady

6. Limitations of Nationalisation
Needs public support
Governments look to ensure that their policies are popular so as to maintain power
If the government believes that the public, rightly or wrongly, disproves of nationalising a
firm or industry, then they are unlikely to go ahead with the acquisition
Need to ensure nationalisation doesn’t just enrich a few rich insiders
Assets should be acquired at a competitive price
Otherwise the government may over-pay for the firm
There will be an opportunity cost to this spending, and welfare may not be maximised
Effectiveness depends upon current efficiency level
If the business was highly allocatively efficient when owned privately, maybe as it was in a
contestable market, there will be limited welfare gains to be made nationalising the firm
Effectiveness depends upon nature of the business
If the private enterprise had already faced competition when part of the private sector,
transfer of ownership merely replaces a privately owned competitive firm with a publicly
owned firm, require government financial support.

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