The Advantages of Privatisation

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The Advantages of Privatisation

In the private sector, decisions are made on the grounds of efficiency and profit. Politicians may make decisions to further their own political ends and not those of the industry in question.

State monopolies tend to create inefficiency, are poor innovators and restrict consumer choice. The existence of consumer sovereignty in the private sector has the potential for widening consumer choice, increasing quality and, through increased competition, lower prices. Basically, the nation's resources will be used more efficiently. Allocative efficiency and productive efficiency will be striven for, and more likely to be achieved.

The small budget deficits and occasional surpluses of the late eighties were in no small part due to the revenues gained by the government from the sale of various industries (from 1979-99 the Treasury has gained £70bn from asset sales). It has also to be remembered that these industries, that were often loss makers, no longer needed to be subsidised by the taxpayer. Finally, if these more efficient privatised industries began to record a profit, the government would tax these profits, thereby helping to keep the PSNCR down.

Is this an argument for privatisation or an end in itself? It is certainly a nice idea that more members of the general public own shares and, therefore, has a direct say in the running of the private sector. But do any of these part-time shareholders bother to go to AGMs to vote on important issues, and how many of them sold their shares as soon as they had made their overnight profit? Almost all of the denationalisations involved under-valued share prices to encourage their sale. With hindsight, this encouragement was not really required as there were normally at least five times as many willing customers as there were shares. Obviously the shares rocketed in value as soon as they were issued, giving these new shareholders an instant profit of anything between 20% (British Gas) and 85% (British Telecom). Some cynics argued that wider share ownership was a Thatcher end in itself as these lucky new shareholders were likely to vote Conservative for the foreseeable future.

The first two advantages are the most important; the second two were significant but not on the same scale. After all, the whole economic point of privatisation was to reduce the influence of the state, which was felt to be inefficient, and to enhance the position of the free market and competition, the most efficient market structure.

Note that the success of privatisation depends not on the transfer of ownership from the public to the private sector, but on the extent to which the resulting set up is truly competitive. Private sector monopolies can be as bad as those in the public sector. Public sector entities that are exposed to competition can be more efficient than private sector firms with little competition (e.g. the Royal Mail).