IGCSE Economics: Privatization Privatization Effects of Privatization on Businesses, Government, and Economy. This is when a firm shifts from the Public to Private sector. Effect 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. ● Loses control of part of the economy due to the firms exit from government control. ● Ownership can go to foreign owners—> this can give government pressure. Effects on Firms Advantages ● As public sectors are mostly monopolies, if privatised, 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 firm remains as a monopoly ● To maximize profits, firms may exploit consumers. ● In order to increase profits, non profit making parts of firm may be abandoned.. e.g. free shuttles to and from work.
Effects on Economy Advantages ● Increase in efficiency lead to increase in economic growth. ● Widens share ownership, so more people in the country are involved in firms. Disadvantages ● 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. E.g. Air Pollution Effects on Firms Advantages ● Increased efficiency-competition ● Access to more funds for investment ● Privatized firms subject to less government interference 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.