Slide 4.1
Chapter 4
Privatisation and deregulation
Griffiths and Wall: Economics for Business and Management 3rd edition
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Slide 4.2
• Removal of rules and regulations
• Potential benefits include
– Opening markets up to competition
– Removing obstacles to business efficiency
– Raising economic welfare (i.e. consumer +
producer surplus)
Griffiths and Wall: Economics for Business and Management 3rd edition
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Slide 4.3
(£)
S
S’
w
P2
A
Change in consumer surplus (ΔCS)= − A − B
Change in producer surplus (ΔPS)= + A − C
Net welfare changes = ΔCS + ΔPS = − B − C
B
P1
C
v
D
0
Q2
Q1
Output
Welfare loss with a quota scheme OQ2 raising price (P2) above the market clearing level P1
Griffiths and Wall: Economics for Business and Management 3rd edition
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Slide 4.4
• Greater efficiency
– Public choice theory
– Property rights theory
– Avoids X-inefficiency
• Greater managerial freedom
• Wider share ownership
• More government revenue
Griffiths and Wall: Economics for Business and Management 3rd edition
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Slide 4.5
• The suggestion here is that the breaking up of
state monopolies (deregulation) and the use of
private sector companies to supply the good or
service, increases the efficiency of provision
• The following three ‘theories’ support this
efficiency argument
Griffiths and Wall: Economics for Business and Management 3rd edition
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Slide 4.6
• This sees politicians and civil servants as
seeking to maximise their own interests rather
than those of the consumers of the public
sector (nationalised) industry
• Politicians seek votes, civil servants seek to
‘please’ their departments (headed by
politicians)
Griffiths and Wall: Economics for Business and Management 3rd edition
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Slide 4.7
• This sees the owners of public sector/ nationalised
industries (i.e. the public) being unable to exercise
effective control over them
• The public is a broad set of people who cannot
influence the policies of the public
sector/nationalised industries in the same way as
shareholders who have voting rights and can
directly influence companies (e.g. at AGMs or by
selling shares etc.)
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 4.8
• This sees public sector/nationalised industries as
being under less pressure to maximise profit
(revenue minus cost) than their private sector
counterparts
• As a result the public sector may be content to
allow costs to be higher than they need be
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 4.9
Price
P2
P1
MC2=AC2
MC1=AC1
MR
0
Q2 Q1
D
Output
Firms operating in the public sector without the competitive pressure may find that they
become inefficient with an increase in their costs from MC1/AC1 to MC2/AC2. This is termed
X-inefficiency and leads to an increase in the price paid.
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 4.10
• As well as greater efficiency, other arguments
include:
– More managerial freedom: e.g. no longer dependent on
government for finance for investment
– Wider share ownership: privatisations allow the public
to buy shares in these industries
– More government revenue: the public purse benefits
from the revenue raised from selling shares in the newly
privatised industries
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 4.11
• Simply converts state monopoly to private
monopoly
• Need for bureaucracy to regulate private
monopoly
• In practice the concentration of share ownership
tends to increase
• Loss of government revenue
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011
Slide 4.12
• Regulators try to limit the possible abuse of
market power in the privatised industries
• Establishing a price cap: this method is to set a
maximum price
• Encouraging new market entry: another method is
to reduce the barriers to entry facing new firms
Griffiths and Wall: Economics for Business and Management 3rd edition
© Pearson Education Limited 2011