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 longrun 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 lead 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.
