Public Ownership

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.

Let’s look at an example from the UK.

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.

Public Ownership vs Private Ownership

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.

A 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.