Nationalization is the acquisition of private companies by the public sector. Privatization is
the sale of public-sector firms to the private sector.
A natural monopoly faces a falling average cost curve. Marginal cost lies below average
cost. Pricing at marginal cost implies losses.
A two-part tariff lets the monopolist set the appropriate marginal charge and recover losses
via the fixed charge. With an information monopoly, however, an inefficient firm will try to
recover unnecessary losses via the fixed charge.
Ideally, state-run firms should price at marginal social cost and invest until price just covers
long-run marginal social cost, including the annual interest cost of the initial capital
expenditure.
Regulatory capture occurs when the regulator becomes the champion of the industry that it
is supposed to regulate.
Privatization was a response to the view that some state companies were not natural
monopolies, and that even natural monopolies were better handled by arms’ length
regulation that committed the government not to intervene perpetually.
Transfer of ownership makes credible the fact that the firm does not have limitless
government backing (though governments do bail out even private companies from time to
time!).
Selling assets at a fair price leaves government wealth unaltered. If prospects of tougher
treatment in the future leads to productivity improvements in state firms, the government
becomes better off when productivity improvement first becomes likely, not when the firm is
sold.
Many privatized firms now face intense competition, often from abroad. However, natural
monopolies have required a new framework of regulation. This has favoured price-capping,
administered by independent regulatory agencies and subject to periodic review.
Increasingly, the UK has been driven to regulate not merely conduct but market structure.
This presupposes that some parts of a natural monopoly can become suitable for
competition. In practice, this has usually been downstream activities in a vertically-related
industry.
The Private Finance Initiative uses private finance to build projects and private management
to run them. The government then pays a service charge to use the asset.
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