‘Critics of the Big Six might argue that electricity companies should not have been
privatised as they can never behave or perform like supermarkets.’ (Extract C, lines
15–16). Using the data and your knowledge of economics, assess the arguments for
and against the UK electricity industry being brought back into public ownership.
Privatisation is when state-owned/government-owned assets are sold to the private sector.
Public ownership is when assets are state-owned which means that it is financed and
controlled by the government. Regulation is when the government imposes laws, restrictions
and rules on firms. Nationalisation is when a privately owned asset becomes publicly/state
owned. This essay will discuss the pros and cons of making the UK electricity industry
state-owned.
One reason why the electricity industry should be publicly owned is that the firm will benefit
from economies of scale. This is because there will be one big firm supplying electricity to
the whole of the UK, all the resources from the Big Six can be
pooled together to create one big firm which leads to lower
costs. As the firm expands the short run average cost curve
continuously shifts to the right as the firm needs to expand
due to diminishing returns. This leads to economies of scale
along the long run average cost curve, which can lead to the
minimum efficiency scale being achieved. Lower costs can
lead to lower prices for consumers leading to an improvement
in consumer welfare. However, as the industry is now a
monopoly market, they may not lower prices and produce at
the profit maximising output where MC=MR. Consumers will have no choice but to pay these
prices as there are no substitute suppliers and electricity is
an essential good. The firm produces at Qm and charges a
price Pm. This leads to the firm making supernormal profits
and there is a loss of consumer surplus. There is
deadweight welfare loss of the shaded blue area. Therefore
one reason why the electricity industry should be
nationalized is that the firm will benefit from economies of
scale however consumers can be exploited with higher
prices.
Another reason why the electricity industry should be nationalised is that the electricity
industry should be a natural monopoly. This is because there are
very high start-up costs to running a power plant which act as a
barrier to entry for new firms. The firm benefits from constant
economies of scale so the LRMC and LRAC curves slope
downwards. If the firm were to operate as a profit maximising firm
they would restrict output by producing at Q where MC=MR and
charge price P. However, if the electricity industry acts as a
natural monopoly they would have to produce at allocative
efficiency, where AR=P=MC at output Q1. This means that the
firm has to charge price P1 , which is less than the cost C so the firm makes a loss. This
means that the government has to subsidise the firm so they can continue to produce at this
output. This is a disadvantage as there is a high opportunity cost for the spending of tax
privatised as they can never behave or perform like supermarkets.’ (Extract C, lines
15–16). Using the data and your knowledge of economics, assess the arguments for
and against the UK electricity industry being brought back into public ownership.
Privatisation is when state-owned/government-owned assets are sold to the private sector.
Public ownership is when assets are state-owned which means that it is financed and
controlled by the government. Regulation is when the government imposes laws, restrictions
and rules on firms. Nationalisation is when a privately owned asset becomes publicly/state
owned. This essay will discuss the pros and cons of making the UK electricity industry
state-owned.
One reason why the electricity industry should be publicly owned is that the firm will benefit
from economies of scale. This is because there will be one big firm supplying electricity to
the whole of the UK, all the resources from the Big Six can be
pooled together to create one big firm which leads to lower
costs. As the firm expands the short run average cost curve
continuously shifts to the right as the firm needs to expand
due to diminishing returns. This leads to economies of scale
along the long run average cost curve, which can lead to the
minimum efficiency scale being achieved. Lower costs can
lead to lower prices for consumers leading to an improvement
in consumer welfare. However, as the industry is now a
monopoly market, they may not lower prices and produce at
the profit maximising output where MC=MR. Consumers will have no choice but to pay these
prices as there are no substitute suppliers and electricity is
an essential good. The firm produces at Qm and charges a
price Pm. This leads to the firm making supernormal profits
and there is a loss of consumer surplus. There is
deadweight welfare loss of the shaded blue area. Therefore
one reason why the electricity industry should be
nationalized is that the firm will benefit from economies of
scale however consumers can be exploited with higher
prices.
Another reason why the electricity industry should be nationalised is that the electricity
industry should be a natural monopoly. This is because there are
very high start-up costs to running a power plant which act as a
barrier to entry for new firms. The firm benefits from constant
economies of scale so the LRMC and LRAC curves slope
downwards. If the firm were to operate as a profit maximising firm
they would restrict output by producing at Q where MC=MR and
charge price P. However, if the electricity industry acts as a
natural monopoly they would have to produce at allocative
efficiency, where AR=P=MC at output Q1. This means that the
firm has to charge price P1 , which is less than the cost C so the firm makes a loss. This
means that the government has to subsidise the firm so they can continue to produce at this
output. This is a disadvantage as there is a high opportunity cost for the spending of tax
