In terms of allocative efficiency, a private firm could be expected to have much greater control over its routes. For example, a private firm may run more services on major roads at peak times then a nationalized company would, and may use price differentiation at high and low peak times of travel in order to gain leisure customers for example And to better manage the efficiency of the service. In 2004, there was a 33.3% increase in the number of passenger journeys compared to 1995 figures, And since privatization, there has been a reversal of a 35 year steady decline in passenger journeys. This is a significant increase which may be due to the effects of privatization, however other factors could influences figure such as the price of alternatives increasing, fashions and trends and population growth. Furthermore, many people are concerned about the growth of passengers has not been met by an increase in capacity, leading to severe overcrowding on many service routes.
Since privatization, you could expect that private firms would be less likely to reinvest profits, as they seek to profit maximizing the short run. However, the government ensures that safety regulations are followed and re-investments are made, which has led to a decrease in the amount of deaths occurring on the rail network. For example, in 2002 there were 0.3 fatalities per billion passengers. In 1992 there were 0.4 fatalities per billion passengers. However, many would argue that this is not a significant decrease, Or that the re-investments made by firms only allow for a “catch up” to where the standard of railway should have been before privatization when investment in the rail network was limited under the Conservative government. However, private firms have increased the quality of customer service and reliability of trains. However some would argue that these benefits have come about through inefficient spending of resources and and that a substantial opportunity cost exists as the money could have been better spent in funding better quality trains to reduce congestion for example.
Another benefit of privatization is that it reduces the amount of money that the government has t’so spend funding the rail network. This allows the government to increase spending in other areas, for example the NHS. However, this has been criticized as the rail network, or the transport network as a whole, is an integral part of our society, and should not be left for private firms to manage, as it could lead to exploitation of consumers. This is a major concern, however has been successfully managed by strict regulation and control by the government and the Competition Commission.
On the other hand however, in long-term private companies may merge to form many dominant firms who would have much more price making power and would be more able to exploit consumers. However, these larger firms would be able to have a substantially greater economies of scale and could potentially offer consumers better value through lower fares. Therefore, a disadvantage of privatization is that multiple firms cannot reach the economies of scale that a nationalized, single company could.
Many private firms may be subsidized by the government. This can be either to allow them to make normal profit or to incentives them to run services in rural areas where they would not otherwise operate. This benefit society in rural areas, however may lead to inefficiencies as the subsidies may reduce necessary cutbacks. However this is to some extent overcome by the fact that the government may reduce the subsidy over a period of time or incrementally each year to allow the firm to eventually make an abnormal profit.
A further disadvantage of privatization is that the firm has no incentive in promoting positive externalities and reducing pollution. Four example, a rail franchise may not invest in more eco-friendly engines, whereas a nationalized Company may have noise and air pollution as a higher priority. Secondly, multiple private firms may inefficiently utilize routes. For example to different franchises may build identical sets of track, whereas it would be more efficient to run services using only one track. This would inevitably lead to wastage and potentially an increase in passenger fares.
Another disadvantage of privatization would be that there is service unreliability due to the network operating close to capacity. This could to some extent be overcome by more effective signalling, longer platforms and trains, and even double-decker trains have been proposed. This would also overcome the issues of overcrowding, which is likely to increase by 20% in the next 10 years, however would cost huge amounts of money to develop and increase the barriers to entry if initial setup costs increase substantially. In the long term, this would reduce competition as it would mean it would be harder for new entrants to enter the market.
In conclusion, privatization has provided many benefits for the rail industry. Many of these benefits have included a increase in safety, reliability and customer service and a decrease in inefficiencies. However there are many disadvantages of privatization which include overcrowding, lack of investment, mergers and acquisitions in the long run which leads to the possibility of exploiting customers, lack of routes in rural areas and the lower levels of economies of scale obtained by firms compared to those of a monopoly owned by the government. Many of these disadvantages have been successfully overcome by regulation by the government. This is essential, as it would ensure that firms that abide by health and safety regulations, however these are often expensive and highly bureaucratic However would arguably lead to a increase in safety standards throughout the network.
While under privatization, you would expect that efficiency would increase, in reality it is difficult to clearly see these gains. It is essential therefore that the rail network overcomes the challenges of overcrowding, efficiencies and provision of rural services in order to be truly beneficial to society and provide economic benefit, and any government funding or subsidy provision must be in line with political objectives and should be all opportunity costs should be fully understood.
