Does privatisation necessarily increase efficiency Essay Example

and innovation. There was a lack of development before nationalisation in industries such as steel and also prior to privatisation in services such as BT. The lack of new investment and technology lead to allocative inefficiency.

High Quality and universality of service both geographically and by sector Production is efficient in terms of minimising costs i. e. (X efficiency) whether through competitive forces and/or economies of scale. Equity in terms of the consumer's ability to pay for monopoly services such as gas and electricity. When the price is inelastic the potential abuse of monopoly power has to be pre-empted by nationalisation or by regulation. Definition of Allocative Efficiency and X-Efficiency are taken from Public sector Economics by Stephen J Bailey

Alocative Efficiency. This is an aggressive economy-wide concept that requires inputs and outputs to be priced at their respective marginal costs and allocated in accordance with the preferences and income constraints of consumers. It is a question about what point on the production possibility frontier is optimal. Allocative efficiency occurs if the distribution of particular public sector outputs is not in accordance with those personal preferences, for example where a planner or monopolist distorts that allocation.

In such a case it may be possible to redistribute resources making someone better off without making someone else worse off. X-Efficiency. This is an organisation-specific concept denoting general managerial and technological efficiency at the same the level of the firm, bureau or organisation. It is a corollary of the profit maximisation assumptions that requires firms to use inputs, solve their organisational problems and produce output at least cost. However, X-efficiency may occur if organisations are insulated from competition by natural statuary

monopolies.

Being shielded from competition, bureaucrats may take ' on the job ' leisure, for example attending highly prestigious international conferences in attractive foreign cities and using unnecessarily generous expense allowance. In such cases they express preferences for cost items besides output, causing X-Inefficiency (also known as organisational slack). The change in ownership of a monopoly places direct government ownership and control of the service, in which the pursuit for efficiency changes but the same objective still exists.

The efficiency case for nationalisation is related to the achievement of allocative efficiency and X efficiency. One of the main reasons for nationalisation is the prevention of monopoly power. The water and gas companies could possibly exploit their local or regional monopolies. Stephen Bailey argues "However it could be argued that the nationalised electricity and gas industries earned monopoly profits immediately prior to privatisation when, at the then conservative governments behest, they raised prices much more than inflation1". Monopolies in the public sector may still abuse their position even if they do not obtain abnormal profits.

Nationalisation simply changes the form in which monopoly power is made. The transmission of electricity through a national grid achieves economies of scale by avoiding duplication. To achieve the economies of scale government investment was required and many of the nationalised companies experienced a delay in the investment plan. Economies of scale may be necessary but not an efficient method for cost reduction, such reduction requires competition which monopolies lack. Some of the nationalised industries existed to promote national security, industries such as steel and shipbuilding.

Industries such as radioactive pollution from nuclear energy were nationalised in order to avoid substantial negative externalities. Special interest

groups were selected for nationalisation, groups such as steel workers and railway workers. Rent seeking activities of public choice theory may have also motivated nationalisation. Stephen J Bailey takes definition of Rent Seeking from Public sector Economics Rent Seeking is the adoption of behaviour patterns that achieve the maximisation of individual welfare or utility through calculation and equalisation of marginal rates of benefit and cost.

Privatisation in the UK began in 1970 with policy analysis by the Conservative opposition. Reducing the power of the public sector trade unions was an important objective. But in the early years of the conservative's government following 1979 election, privatisation was a marginal policy. Some public assets were sold-such as cable and wireless in October 1981 and Amersham International in 1982. Within ten years many public sector companies had been sold off to the private sector. Table 1. 1 Highlights Nationalisation and privatisation in the UK