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Public Ownership

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Economics

What's the first thing that comes to your mind when you hear the words ‘public ownership’? If you think about the government owning a part of a country’s national resources, then you're on the right track. But, what are the economic benefits of public ownership? How is it different to private ownership and what disadvantages does it have?

You will be able to answer all these questions once you read what follows.

Public Ownership: Meaning

When a government acquires assets such as machinery, factories, railways, or others, this process is called nationalisation. Industries that are ‘publicly’ owned or state-owned are referred to as nationalised industries.

We talk about public ownership when a central or local government owns industries, firms, and other assets such as housing, railways, or coal mines.

Let’s look at an example from the UK.

After the Second World War, nationalisation in the UK started to rise. The Labour government under Clement Attlee (and other successive Labour governments) started taking the coal mining, railway, and steel manufacturing industries into public ownership. The government’s justification was that to be more effective, they would have to control the most efficient and most important industries in the economy. In their eyes, those industries were too important to be left under private ownership.

At the time, and to a certain extent today too, public ownership was seen as a method to regulate the problem of monopolies. Too many firms were gaining too much control and were becoming the single dominant economic agents in their industries.

Nationalisation is the process where the government acquires assets such as machinery, factories, railways, or others from the private sector.

Public Ownership vs Private Ownership

Private ownership is the ownership of industries, firms, and other assets such as housing, railways, or coal plants by private individuals or organisations rather than the state.

When a company is privately owned, it is not publicly traded. This means that the company will not hold a share structure (which it would have had it been public) that enables them to raise funds and further capital. Examples of private companies include small family-owned businesses and other SME's.

The difference between public ownership and private ownership lies in the type of incentives and externalities. Private ownership is driven by profit, whereas in public ownership, the incentive is that workers feel like they are part of the company. The government will be cautious of the type of externalities a firm has, whereas a private company might ignore the external cost and impact their company has.

Public Ownership Examples

While there are many examples of the process of public ownership, we are going to look at two examples from when the UK government decided to nationalise some of its key industries.

There have been times when the UK temporarily nationalised some of their industries.

One case was the banking industry in light of the 2008 financial crisis. Here, under the Labour government of Gordon Brown, banks like Lloyds, HBOS, and RBS were partially nationalised as they were deemed too important to collapse. If there were banks in danger of failing, they were nationalised or merged with other banks to sustain and continue operations.

The government’s intention was to sell these banks back into the private sector once they achieved a financially stable and viable position.

Public Ownership Examples: coal industry SrtudySmarterA coal mine in the 1900s, Wikimedia Commons.

The second example was the coal industry in the aftermath of the Second World War. Under Clement Attlee, the coal industry was nationalised when at least 800 coal mines were taken under government ownership. This subsequently lead to the establishment of the National Coal Board which would oversee the operations.

Finally, a third example is the East Coast Railway nationalisation in 2010. This main train line that connects London to Edinburgh was nationalised and then privatised again in 2015.

Railways are a special example in the UK. The country has a history of nationalising the industry under Labour governments and then privatising it again under Conservative governments.

Advantages of Public Ownership

Some advantages of public ownership include limiting monopoly abuse, profit going back to taxpayers, prioritising the long term over the short term, better labour conditions, and positive externalities.

Limiting Monopoly Abuse

Perhaps one of the main advantages of public ownership is that it limits companies from using their monopoly power to abuse consumers in terms of pricing. This is especially true for natural monopolies with only one firm where it is hard for new firms to enter the market. That's because it is hard to scale up the production in such industries: think how hard it is to build a network of electricity submission. Public ownership can scale up these industries without harming consumers.

Profit Goes Back to Taxpayers

The government’s money to fund investment in publicly owned companies and industries comes from taxpayers.

These companies’ profit goes back to the government, which is then invested in other public infrastructures such as railroads, schools, or hospitals. In this way, you have an indirect return on your tax money. However, if the company was privately owned, the profit would have been shared amongst shareholders.

Prioritising the Long Term Over the Short Term

State-owned enterprises tend to focus more on the long-term benefits than privately-owned companies. State-owned companies will be willing to incur some costs in the short run as long as they can have more benefits in the future.

Moreover, the government will also consider maximising the consumers’ benefit. On the other hand, privately-owned companies will keep their focus on maximising long-term profits. That is because they need to make their shareholders happy constantly. Otherwise, the company will be in some financial trouble.

Better Labour Conditions

It is more likely that people who work at a state-owned company will enjoy more benefits than those working in a privately owned company. This is especially true for unskilled work that a profit-maximising firm could easily replace.

Positive Externalities

When the government owns the railway system, they can reduce the ticket price even though it might mean that they are not making any profit. The reason for that is to provide the incentive for people to use public transportation to reduce pollution. However, this is not the case for a privately owned company.

Disadvantages of Public Ownership

While nationalisation and bringing assets under public ownership can have advantages, there are also some disadvantages. For example, the increase in government debt, no competition, less revenue, less investment, and inefficiencies.

Increase in Government Debt

Often sustaining state-owned enterprises comes with a lot of costs. That is especially true if the production process becomes inefficient and the government is willing to forego some profits in exchange for other benefits. This contributes to an increase in government spending funded by debt the government will have to pay in the future.

No Competition

Competition and the benefits of competition will have to be traded off when the government owns a company. That means that there will not be other companies constantly looking to make their products better and compete with one another for customer acquisition, which in turn leads to innovation.

Less Revenue

Privately-owned companies have the incentive to generate a huge amount of revenue quickly. This revenue could then be used to finance other projects that would benefit customers. However, that is not the case for public ownership.

Less Investment

Nationalised assets such as railways will have a limited scope of long-term investment and modernisation. In the long run, governments will try to balance their budgets to fulfil the investment duties on other factors such as education, health care, and infrastructure.

Inefficiencies

There are also possibilities of political, social, and economic interferences that can make operations of that certain asset such as railways or coalmines ineffective and inefficient. This makes overall management more complicated.

Public Ownership-Key Takeaways

  • Public ownership happens when a central or local government owns industries, firms, and other assets such as housing, railways, or coal mines
  • Sometimes, public ownership is seen as a solution to monopolies.
  • Private ownership is the ownership of industries, firms, and other assets such as housing, railways, or coal plants by private individuals or organisations rather than the state.
  • Nationalisation is the process where the government acquires assets such as machinery, factories, railways, or others from the private sector.
  • Examples of public ownership include the railway services, or partially nationalising the banking industry during the 2008 financial crisis.
  • Advantages of public ownership include: limiting monopoly abuse, profit going back to taxpayers, prioritising the long term over the short term, better labour conditions, and positive externalities.
  • Disadvantages of public ownership include an increase in government debt, no competition, less revenue, less investment, and inefficiencies.

Public Ownership

An example of public ownership is the coal industry in the aftermath of the Second World War. Under Clement Attlee, the coal industry was nationalised when at least 800 coal mines were taken under government ownership. This subsequently lead to the establishment of the National Coal Board which would oversee the operations. 


Public ownership works by handing over the control of different industries, firms, and other assets such as housing, railways, or coal mines to the government. 

Private ownership is when individuals or private organisations own industries, firms, and other assets such as housing, railways, or coal plants. Public ownership is when the central or local government owns those assets.

The disadvantages of public ownership are a limited scope of long-term investment, the chance of resources becoming inefficient, higher costs.

Public ownership is when the central or local government owns industries, firms, and other assets such as housing, railways, or coal plants.

Final Public Ownership Quiz

Question

What is public ownership?

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Answer

It's when the local or central government owns industries, firms, and other assets such as housing, railways, or coal plants.

Show question

Question

What is private ownership?

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Answer

It's when an individual or private organisation own industries, firms, and other assets such as housing, railways, or coal plants rather than the state.

Show question

Question

What industry did the UK partially nationalise during the 2008 financial crisis?

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Answer

The banking industry. 

Show question

Question

What are some examples of privately-owned companies?

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Answer

  • Small to medium enterpises 
  • Family-owned businesses 

Show question

Question

What is nationalisation?

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Answer

When a government acquires assets such as machinery, factories, railways, or others, this process is then called nationalisation. Industries that are publicly owned or state-owned are referred to as nationalised industries. 

Show question

Question

What is an example of nationalisation in the UK?

Show answer

Answer

When the Labour government under Clement Attlee (and other successive Labour governments) started taking the coal mining, railway, and steel manufacturing industries into public ownership. 

Show question

Question

Why did the UK government take coal mining, railway and steel manufacturing industries into public ownership?

Show answer

Answer

This came under the justification that for the government to be effective, they would have to control the most efficient and most important industries in the economy.

Show question

Question

What was the initial justification for public ownership in the UK?

Show answer

Answer

Public ownership at the time (and to a certain extent today as well) was seen as a method to regulate the problem of monopolies.

Show question

Question

What is the difference between public and private ownership?

Show answer

Answer

Private ownership is when individuals or private organisations own industries, firms, and other assets such as housing, railways, or coal plants. Public ownership is when that ownership belongs to the government.

Show question

Question

What are the disadvantages of public ownership?


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Answer

Increased government debt, no competition, less revenue, less investment, inefficiencies.

Show question

Question

Why did the UK government partially nationalise the banking industry during the 2008 financial crisis?

Show answer

Answer

Big banks like Lloyds, HBOS, and RBS were partially nationalised as they were deemed far too important to collapse.

Show question

Question

​​​​​What are the advantages of public ownership?


Show answer

Answer

Limiting monopoly abuse, profit goes back to taxpayers, long term over the short term, better labour conditions, positive externalities.

Show question

Question

Why will publicly owned assets have less investment?

Show answer

Answer

Nationalised assets such as railways will have a limited scope of long-term investment and modernisation as, in the long run, governments will try to balance their budgets to fulfill the investment duties on other factors such as education, health care, and infrastructure. 

Show question

Question

Explain how public ownership limits monopoly abuse.

Show answer

Answer

Perhaps one of the main advantages of public ownership is that it limits companies from using their monopolistic power to abuse consumers in terms of pricing. This is especially true for natural monopolies with only one firm, and it is hard for new firms to enter the market. That's because it is hard to scale up the production in such industries; think how hard it is to build a network of electricity submission. Public ownership is capable of scaling up these industries without harming consumers.

Show question

Question

Why may public ownership lead to more government debt?

Show answer

Answer

Often sustaining state-owned enterprises comes with a lot of costs. That is especially true if the production process becomes inefficient and the government is willing to forego some profits for other benefits in exchange. This contributes to an increase in government spending funded by debt the government will have to pay in the future.

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