Econ 206(A) Tutorial 9 Government and Private Provision

Private vs Public Ownership Some Key questions: (a)Are private firms always more efficient than public (government owned) firms? (b)For some goods/services are there objectives other than efficiency to consider? (c)Are their some goods/services that the private sector will not provide?

Government Provision Why does the government provide: –Education –Health –Defence

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?

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).

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)

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

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).

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?

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)

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).