Summary of privatisation and regulation

Summary

  • Natural monopolies pose particular problems for policy, as setting a price equal to marginal cost causes firms to make a loss
  • In the past, many such industries were run by the state as nationalised industries
  • However, this led to large X-inefficiencies due to a massive principal-agent problem
  • Regulation was put into place to ensure that newly privatised firms did not abuse their market positions
  • Prices were controlled through the RPI – X rule
  • In some cases regulatory capture was a problem, whereby the regulators became too close to their industries
  • The authorities have also attempted to encourage efficiency through the establishment of Public Private Partnerships, such as the Private Finance Initiative
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