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What are advantages and disadvantages of privatization?

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May 15, 2014 6:44PM

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ADVANTAGES OF PRIVATISATION

·Privatisation places the risk in the hands of business or Private Enterprise.

·Private enterprise is more responsive to customer complaints and innovation.

·The Govt. should not be a player and an umpire.

·Privatisation provides a one off cash boost for Govt. This can be spent on Hospitals etc...

·Privatisation leads to lower prices and greater supply.

·Competition in privatization increases differentiation.

Disadvantages of Privatisation

1. Privatisation is expensive and generates a lot of income in fees for specialist advisers such as banks.

2. Public monopolies have been turned into private monopolies with too little competition, so consumers have not benefited as much as had been hoped. This is the main reason why it has been necessary to create regulators (OFWAT, OFGAS etc). This is an important point. It partly depends on how the privatisation took place. For example, the railways were privatised in bit of a rush and there might have been other ways to do it so that more competition was created. It partly depends on the market. Some markets are 'natural monopolies' where competition is difficult. For example, it would be very wasteful and expensive to build two sets of track into Liverpool Street just to create some competition. Natural monopolies create a special justification for public ownership in the general public interest.

3. The nationalised industries were sold off too quickly and too cheaply. With patience a better price could have been had with more beneficial results on the government's revenue. In almost all cases the share prices rose sharply as soon as dealing began after privatisation.

4. The privatised businesses have sold off or closed down unprofitable parts of the business (as businesses normally do) and so services eg transport in rural areas have got worse.

5. Wider share ownership did not really happen as many small investors took their profits and didn't buy anything else.