Many countries operate a mixed economy, which lies somewhere between fully nationalised and fully free-market economies. The mix may vary as the result of changes of government, with socialist governments tending to favour a higher proportion of nationalised industries. A nationalised industry is one that is owned and controlled by the state. The current trend is towards less nationalisation, and more private ownership of industry, even for areas regarded as essential services.
In free-market economies, government is responsible for providing “public goods.” These are goods and services such as roads, defence, and education that would not exist if government didn’t provide them because private businesses have no incentive to produce them. Public goods have two characteristics: – consumption by one individual does not reduce the amount of the good left for others; and the benefits that an individual receives do not depend on that person’s contribution.
Governments generally regulate “natural monopolies” such as utilities or railways. These industries require such a large investment, that it would not be profitable to have more than one provider. Regulation is used in place of competition to prevent these monopolies from making excessive profits. There are exceptions, however, with railways being privatised for example. The result has been increased costs to the consumer, in spite of regulation.
Nationalised industries are funded from taxes. These industries represent huge investments, and are in effect “social capital”. Profits from the industry accrue to the national exchequer, and losses are funded from the same source to ensure continued provision of the product or service. Unfortunately, loss-making nationalised industries are prime targets for privatisation in times of hardship, but the impact of the corresponding loss of “social capital” is disregarded. Unfortunately again, nationalised industries appear to have a tendency towards making a loss, possibly because the intention is not to show a profit, but to provide a service or product at reasonable cost to the public.
There are distinct advantages to the public, however, if an industry is nationalised. Prices are kept to reasonable levels, for increased costs can be recovered by other means, ie. taxes. Penetration of supply to remote areas is excellent, for increased costs in one area can be averaged out over the whole country. A nationalised industry is more stable than a private one, for it has the financial backing of the complete country, rather than that of only a company, with relatively limited resources.
Private companies, on the other hand, must remain profitable to survive. Previously, two major influences on profitability were the prices of products, and efficiency of production. Now, there is a further option to reduce manufacturing cost significantly – outsourcing. Production costs and profits are not the sole arbiters of retail price for the product, however. It is normal to pitch the retail price at the “what the market will bear” point. For multinational companies, this may mean that the price in one country is higher than in another, to the decided disadvantage of those people living in a region of higher prices. Where a company is able to significantly reduce costs, by manufacture in another country where labour costs are low, for example, these savings are not passed on to the customer, but go to improved profits for the company.
Although government may regulate company profit margins for key industries, the cost to the consumer is inevitably higher if the service or product is provided by a private company. This should not in fact be surprising, for in addition to the normal management structure, two extra layers have been added:- the company’s board of directors, and the company’s shareholders. As the shareholders’ dividend is usually based on the company’s profits, and expansion is partially funded from profits, any increase in profitability is automatically diverted away from the consumer.
A relatively new concept is the Public-Private-Partnership, which may combine the advantages of both systems. However, data to confirm or disprove this theory is not available, and the probability is that it will also combine the disadvantages of both systems. The management structure and the sharing of responsibility are more complicated than would otherwise be the case, and the likelihood is that overall costs will be higher as a result.
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