✅ Possible positives
The new owners want to keep customers, so quality and service may improve. If other firms are allowed to compete, consumers may get more choice and lower prices.
The Mixed Economy » Privatisation
What you'll learn this session
Study time: 30 minutes
Edexcel spec: 1.1.5 (j) and (k)
- What privatisation means
- How privatisation can help and harm consumers and workers
- How privatisation affects businesses and the government
- How to weigh up both sides and reach a judgement
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Unlock This CourseWhat is privatisation?
Privatisation means selling a state-owned business, like a railway, to private owners
You have seen that a mixed economy has a public sector and a private sector. The balance between them is not fixed. A government can decide to change it. This lesson is about one way of doing that. It is examined on Paper 1 (Microeconomics and Business Economics).
Key terms:
- Privatisation: the sale of a business or an industry owned by the government (the public sector) to the private sector.
After privatisation, the business is owned by private owners, such as shareholders, instead of the government. It is now run to make a profit. For example, in the UK, the telephone company British Telecom was sold to the private sector in 1984, and the postal company Royal Mail was sold in 2013.
Governments privatise for different reasons. They may want to raise money from the sale, or hope that private owners will run the business better. Whether this works depends on the situation. Let us look at four groups.
Effects on consumers
❌ Possible negatives
If the business is the only one in its market, it may raise prices because customers have nowhere else to go. Services that lose money, such as a rural bus route, may be cut because the aim is now profit.
Effects on workers
After privatisation, new owners may cut costs, which can mean job losses or new ways of working for staff
💰 Possible positives
A growing, profitable business may offer new jobs, training and promotion. Some firms give workers shares or bonuses linked to profit.
🔒 Possible negatives
To cut costs, private owners may reduce the number of workers or hold down wages. Public sector jobs are often seen as more secure, so workers may feel less safe after the sale.
Effects on businesses
The business that is sold usually changes the most. Once it is in the private sector, it is no longer controlled by politicians. It can make its own decisions, borrow money from banks and investors, and use new technology. The profit motive gives managers a reason to cut waste and be more efficient.
There are drawbacks too. The business now has to make a profit to survive. It may face competition for the first time. Shareholders expect a return, so managers may focus on short-term profit instead of long-term plans. Other private firms in the same market can also be affected, because the market is opened up to new rivals.
Effects on the government
🏦 Possible positives
The government receives money from the sale. It no longer has to pay for the business's losses or its investment, so it saves taxpayers' money. It can spend on other priorities, such as schools.
📄 Possible negatives
The government loses the future profits of the business. It also gives up control, so it cannot easily make sure that important services reach everyone. If the sale is rushed, it may get a low price.
Worked example
Country Z sells its state-owned railway to a private company for 2 billion Zed. Before the sale, the government paid 300 million Zed each year to cover the railway's losses.
Government: it gains 2 billion Zed from the sale and stops paying 300 million Zed a year. This is a positive. But it also loses any profit the railway could make in future. Consumers: trains may become cleaner, but the company may raise fares and close quiet routes. Workers: the company may cut jobs to save money. Each group gains something and may lose something.
Weighing up the effects
Exam questions often ask you to evaluate privatisation. This means looking at both sides and then making a judgement. Good evaluation uses words such as "it depends on...". Two things often matter most:
- Competition: if the privatised business faces rivals, consumers are more likely to gain. If it becomes a private monopoly, consumers may lose out.
- The type of service: if people cannot do without the service, such as water or rail travel to work, the risk of higher prices and cuts to poorer areas matters more.
A strong judgement might be: "Privatisation is more likely to benefit consumers if there is real competition, but this may harm workers if jobs are cut." Always give a reason for your view.
Common mistakes
Saying privatisation is always good or always bad. It has both positive and negative effects, so give both. Another mistake is mixing it up with the government setting up a new business. Privatisation means selling something that the government already owns. Finally, do not only list effects. Explain them, for example: "workers lose jobs because the new owners want to cut costs".
Exam-style question
Read the context, then answer the questions. This is a Paper 1 style question.
The government of Country Q owns the only national airline. It has lost money for years. The government has decided to sell the airline to private investors.
(a) Define privatisation. [2 marks]
(b) Explain one way the sale might benefit the government of Country Q. [2 marks]
(c) Evaluate whether the sale of the airline will benefit consumers and workers. [6 marks]
Model answer
(a) Privatisation is the sale of a business or industry (1) from the public sector to the private sector (1).
(b) The government will receive money from the sale (1). It will also no longer need to pay for the airline's losses, so taxpayers' money can be spent elsewhere (1).
(c) Consumers might benefit because private owners want to attract customers, so service and quality may improve (1). If other airlines are allowed to compete, prices may fall and choice may rise (1). However, if the airline stays the only one in the country, it could raise fares and cut loss-making routes (1). Workers might gain if the airline grows and offers new jobs and training (1). But the owners may cut jobs and wages to reduce costs (1). Overall, consumers are likely to gain only if rival airlines are allowed in, while workers may lose out if the new owners cut costs (1).
Exam tip
In a 6-mark evaluate question, write at least one point for each side about each group. Finish with a short judgement that says what the result depends on.