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

Authors Avatar 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.

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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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