May 2017 Q1 a.
Privatisation can refer to the act of transferring ownership of specified property or business operations from a government organisation to a privately owned entity, as well as the transition of ownership from a publicly traded, or owned, company to a privately owned company.
Required:
i) Describe THREE potential benefits of privatisation. (3 marks)
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- Improved efficiency- the main argument is that private companies have a profit incentive to cut costs and be more efficient.
- Lack of political interference- it is argued that governments are usually poor economic managers. They are motivated by political pressures rather than sound economic and business sense.
- Remove political issues- governments are concerned with winning the next election. They may be unwilling to invest in infrastructure improvement which bring long term benefit.
- Increased competition- often privatisation of state owned monopolies occurs alongside deregulation to allow more firms to enter the industry and increase the competitiveness of the market.
- The government will raise revenue from the sale. Selling state owned assets can raise significant revenue.
ii) State THREE disadvantages of privatisation (3 marks)
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- Privatisation does not necessarily increase competition. Whether competition is increased depends on the nature of the market.
- The sale proceeds is one-off benefit. The government loses out on future dividends from the profits of public companies.
- Some industries perform an important public service that should not have profit as the primary objective, for example health care.
- Private companies may exploit the public, leading to higher costs and lower standards.
- If a private sector monopoly is created, it will require monitoring and regulation.
- Private sector organisations are also guilty of favouring short term results over the organisation’s longer term prospects.