The Disadvantages of Privatisation

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The Disadvantages of Privatisation

Those who have opposed privatisation argue that the public utilities were nationalised in the first place in the public interest. The utilities are products and services that are essential to all members of the general public. A private company in charge of one of these industries, interested only in profit, is likely to close down or marginalize unprofitable elements of its operations (e.g. cutting expensive remote services like phone boxes in the Shetlands). As nationalised companies, unprofitable but essential services continue through cross-subsidisation; unprofitable services being subsidised by the profitable services. Why else do you think that a first class stamp costs 27p whether you send a letter to a friend living miles away or to a friend living locally? As it happens, phone boxes were not closed, but this was only due to the existence of regulators. There have, though, been some worrying developments in the railways, with poorer services and timekeeping following privatisation.


As we said earlier (in the 'monopoly' Learn-It), competition in industries that are natural monopolies wastes resources. The government avoided this problem in most cases by selling off industries in one go to one company. Unfortunately, this meant that the government had simply transformed an inefficient state run monopoly into a slightly more efficient but privately run monopoly with no competitive pressures. The whole point of privatisation was to allow competition to occur. In most cases this was difficult precisely because the industries in question were natural monopolies. Hence, all the utilities have regulators who make sure these privatised monopolies do not take liberties with their customers. Having said all that, many of the very monopolistic utilities have had competition forced upon them in the late 90s (e.g. gas, electricity and even water to a certain extent).

Unexpectedly, all of the utilities create negative externalities (via pollution, spoiling the environment, etc.) It can be argued that as public sector companies, the government can regulate output and make sure that it is at the socially optimal level (i.e. allow for externalities). In the private sector, maximisation of profit is the only concern, so a socially damaging level of externalities will occur. It should be noted, though, that the government could still achieve a socially optimal output level by subsidising/taxing the privatised utilities until the desired outcome is achieved (see the topic called 'market failure' if you are muddled).

One can argue that the increasing inequality of the eighties was, in part, due to privatisation. The government was selling off state assets (owned by everyone) to a wealthier subset of the population, thereby increasing the gap between the rich and the poor. Although it can be argued that the poorer have gained through improved services (e.g. BT), this is not true of all utilities and those at the top end have got ridiculously wealthy.

One of the major advantages of nationalised industries is that their sheer size allows them to take advantage of economies of scale. Privatisation normally involves the break-up of a large entity into many smaller ones. This was particularly true with the railways. These smaller units will not be able to take advantage of economies of scale in the way that British Rail could in the past.

Privatisation forces the new private companies to be efficient, or at least find some way of reducing their costs in order to make a profit given the strict pricing formulae used by the regulators (see later). By far the most popular way of cutting costs for these firms was to shed labour in large quantities. Productivity definitely rose in these industries, but was it due to increased efficiency via improved management, etc., or just a similar output being produced by fewer workers?

The second most popular question asked by examiners is, "to what extent has privatisation been successful?" Or a variation on that question, "How successful have regulators been in controlling the privatised utilities?" In the next Learn-It, therefore, we shall look at the privatised utilities in more detail.