IGCSE Economics: Privatization

IGCSE Economics: Privatization

Privatization is the process when a firm shifts from the Public to Private sector. It has various effects on businesses, the government, and the economy.

Effects on Consumers:

Advantages:

Increase in revenue from sales.
Less government spending as “loss-making” privatised firms no longer have to be subsidized.
Disadvantages:

The government no longer earns profits from the firm.
The government loses control of part of the economy due to the firm's exit from government control.
Ownership can go to foreign owners, which can put pressure on the government.

Effects on Firms:

Advantages:

As public sectors are mostly monopolies, if privatized, increased competition brings a fall in prices, increased quality, a wider variety of products, and new products through R&D.
Disadvantages:

Prices may rise if the firm remains as a monopoly.
To maximize profits, firms may exploit consumers.
In order to increase profits, non-profit-making parts of the firm may be abandoned, for example, free shuttles to and from work.

Effects on the Economy:

Advantages:

Increase in efficiency can lead to an increase in economic growth.
Privatization widens share ownership, so more people in the country are involved in firms.
Disadvantages:

The firm may be bought by foreigners, and profits will be taken out as invisible imports on the BOP.
Unemployment may rise.
Inflation may increase.
Negative externalities may increase as firms try to maximize profits. For example, air pollution.
Effects on Firms:

Advantages:

Increased efficiency due to competition.
Access to more funds for investment.
Privatized firms are subject to less government interference.

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Disadvantages:

Privatized firms can be taken over by competitors.
Natural monopolies operate better than small firms.
If a firm is broken into smaller units, it may lose economies of scale.
Question: Analyze one modern example, from a country of your choice, where the advantages and disadvantages of Privatization are transparent.