Econ 206(A) Tutorial 9

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Econ 206(A) Tutorial 9

• Government and Private Provision

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Private vs Public Ownership

• Some Key questions
• Are private firms always more efficient than
  public (government owned) firms?
• For some goods/services are there objectives
  other than efficiency to consider?
• Are their some goods/services that the private
  sector will not provide?

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Government Provision

• Why does the government provide
• Education
• Health
• Defence

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Private vs Public Ownership

• Issues
• The private sector may not provide efficient
  provision in the presence of externalities,
  public goods (or credit constraints)
• What about equity and/or providing basic levels
  of service?
• How should monopolies be dealt with?

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Government Intervention

• A key question is when should the
• government should intervene and how
• Government provision (state ownership)
• Regulation
• Contestability (splitting contestable markets
  from natural monopolies).

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Nationalisation

• Government provision can occur through
• The nationalisation of a private firm.
• or they may set up providers in an existing
  market (education for instance).
• Many nationalisations have occurred in the UK
• including
• BBC (1927)
• British Airways (1939)
• Rolls Royce (1971 then privatised in 1973
  1987) British Leyland (1976 privatised 1986)

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Privatisation

• Many previously nationalised firms.
• British Gas, British Telecom
• British Rail
• Water utility companies.

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Privatisation

• Often a firm is privatised along with the whole
  industry (i.e. barriers to entry are removed and
  new entrants are allowed).
• For instance British Gas was privatised (through
  the sale of equity to the public), and a number
  of other firms were allowed to sell gas to
  customers.
• So we move from a government monopoly to a wholly
  private more competitive market.
• Note this can happen without privatisation (think
  ITV, Channel 4 and Channel 5, but BBC remains
  state owned).

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Monopoly

• Is a private monopoly necessarily more efficient
  than a state-owned monopoly?
• Could it be in the public interest to provide
  higher output at a lower cost?

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Contestability

• The monopoly component of production can (in
  theory) be reduced by
• splitting the natural monopoly component (think
  phone line provision and maintenance or
  electricity generation) from a contestable
  component.
• Allowing firms to compete in the contestable
  market (i.e. electricity/phone retail)

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Rail Provision in the UK

• Track maintenance etc (Network Rail) split from
  the contestable element of running trains
• However not appropriate for train providers to
  compete against each other on same line.
• So firms have some monopoly rights for a period
  after which it is put up for tender (Virgin just
  lost Penzance to Aberdeen line)
• If firms have not performed satisfactorily they
  are less likely to regain the monopoly rights (or
  get a new line).