Did the privatisation of British Rail lead to an efficient outcome?

by dingcarsongmailcom (student)

The privatisation of the railway network in the UK illustrates that competition and the free market lead to more efficient outcomes than the government ownership of ‘natural monopolies’.

In some markets, such as natural resources and railway services, it can be more efficient to have small amount of suppliers or even one supplier only. The term Natural Monopoly comes to be used to refer a market where long-run average costs are lowest when output is produced by one firm.

In these sorts of industries, the total fixed cost is majority of the total cost. Therefore, in the cost diagram, the Average Cost shape is like the Average total cost shape: sloping down. There is only economics of scale. As firms increase their size, average cost falls, benefiting both firms themselves and the whole society. This is a situation where one firm can supply the market at a lower price than two or more firms due to the existence of economics of scale and the avoidance of wasteful duplication.

If these firms are in the private sector, as profit-maximisation is their goal, they are likely to charge very high price because in their knowledge, there will never be any competition. In the diagram, at the (profit-maximised) output, the price they sold (where AR cuts quantity output) is higher that average cost at that quantity output, generating Super Normal Profits. As a result, the market will fail to achieve allocative efficiency (equilibrium price is higher than marginal cost).

To tackle this issue, some economies conclude these natural monopolies, the best owner of it is the ...

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To tackle this issue, some economies conclude these natural monopolies, the best owner of it is the government. When the supplier in these industries are state-owned, their goal will no longer be profit-maximisation. Instead, they will attempt to achieve allocative efficiency. (There is no productive efficiency in natural monopolies because there is no minimum average cost.) Hence, as shown in the diagram, Price=AR=MC, achieving allocative efficiency. As a result, quantity output be higher and price consumers pay will be lower, compared to the situation which owners of natural monopolies are private firms.

For privatisation

In the history of British Rail, during the age of nationalisation (1948-1995), the number of passengers was falling until privatisation in 1995. Since then, the number of passenger has grown rapidly. This is because competition between railway operators has resulted in new routes for new journeys and better service for commuters.

Against privatisation

However, it also can be argued that the decrease of the number of passengers during the nationalisation period was not entirely due to nationalised but the fact that cars have become more affordable since 1960s, therefore more people preferred used road transport instead of rail transport, resulting in decreasing number of passengers of nationalised British Rail.

After selling British Rail to private shareholders, operating companies have legal duty to maximise their profits for shareholders, rather than put passengers first. It allows them to use a large amount of profits to pay out in dividends to shareholders instead of reinvesting. Furthermore, once big investment banks bought share from the public, benefits from train operating companies would no longer benefit the public.

For nationalisation

There are several advantages for public ownership of railway services. When train operators want to invest a new programme, it has lower borrowing cost for government-financial investment, which will save a lot.

Against nationalisation

Moreover, maintaining and upgrading the railway service will cost the government billons of pound per year. If costumers complain of high fares to the government, they must spend more to subsidise the railway, which means a reduction in public spending in other sectors.

In conclusion, when an economy attempt to deal with Natural Monopolies, it has to consider the consequence of either way.