Economic Environment of Business

Privatisation and Deregulation: The case for and against.

Why might natural resources be under state control? Natural monopolies

May exploit customers if in private hands

Public service v private profit

Regulation of private business may be used as an alternative to state control – Privatisation.

What is privatisation?Liberalisation of entry into markets previously run by the state (e.g. Licences changed etc.)

Private v public provision (e.g. contracting out domestics at hospitals)

The sale of publicly owned assets

Motives for PrivatisationPolitical – to reduce the power of the state and the trade unions

Efficiency argument – reduce overstaffing. Profits as a stimulus to improve efficiency

Competition – take away monopoly powers, allow allocative efficiency by responding to market signals

Receipts from sale of industry

Wider share-ownership (makes it more difficult to re-nationalise – see Railtrack)

Break union power – and increase productivity

The case against PrivatisationAbsence of competition

Reducing share price by breaking up state monopoly

Externalities e.g. British Rail and car users (private v social costs)

Under-valuation of state assets – use of sweeteners has bad effect on the psyche of small investors – expect quick, risk-free profits

Short-termism in long-term investment areas

Opportunity costs – deprives banks etc. of money which could have been used to generate real capital rather than transferring the ownership of existing capital

Burden on tax-payers – sold shares they already own! Non-shareholders are dispossessed

The Regulation of privatised industry

Privatisation of natural monopolies may give rise to abuse of dominant position. Thus: the emergence of regulatory offices to reassure the public. (e.g. OFTEL, OFWAT). Nonetheless, the privatised company can still complain to Competition Commission if it feels regulations are unfair.

So what is regulation?

Regulation: A definition

“Regulation may be defined as the various rules set by governments or their agencies which seek to control the operation of firms.”

Role of the regulator is to ensure there is no abuse of dominant position/ market failure.

What is the role of the regulator?

Create constraints and stimuli (price caps and performance targets)

Encourage long term competition (reducing barriers to entry)

Regulation may sometimes lead to adverse outcomes:

Lower profits by increasing costs – thus longer term potential for low investment

Lower dividends

Reduced employment (e.g. GB Gas)

Cost saving at expense of welfare benefit

Deregulation “Deregulation may be defined as

efforts to remove the various

rules set by governments or their

agencies which seek to control

the operation of firms.”

(Griffiths & Wall, 2004, p191)

SummaryWe established: Motives for, and the case against

privatisation The case for and against regulation The case for and against deregulation Considerations with respect to competition

Next Week

Regional Policy

What is the regional “problem”? What are the main measures of UK Regional

Policy? How can its effectiveness be measured?