Privatisation and nationalisation both has their advantages and disadvantages.

Hence the decision to privatise a sector or to have governments take over

businesses, mostly hinges on their relative economic efficiency.
Economic efficiency consists of the productive efficiency and also the allocative
efficiency. One of the arguments in favour of privatisation is due to its productive
efficiency. Behavioural theories of the firm, in which private firms are in
competition with each other, incentivises private businesses to cut cost and
increase profit. For example, during the 1940s, UKs fuel and power and
transport sectors were nationalised and relied heavily on various forms of
subsidies to cover their losses. Hence, privatisation leads to greater productive
efficiency.
Besides that, private sector firms have an incentive to provide both choice and
quality. As they are often in competitive markets, the failure to do so will result in
loss of consumers and subsequently profit. Even if they are monopolies,
privatised firms can often raise prices and expand their market by providing
quality services with choice. As an example, water privatisation is now the
favoured way forward for tackling Africas serious problems of water provision.
The push for privatisation is now required by the International Monetary Fund as
a condition for African countries receiving loans. By privatisation water supply,
water provision infrastructures have improved. Hence, providing choices and
higher quality fulfils the aspects of allocative efficiency.
As with choice and quality, state organisation have little incentive to innovate.
Private sector firms however, can earn higher profit if they innovate and market
to their consumers. This increases the dynamic efficiency of the economy. The
sale of the water and rail industry during Thatchers reign, led to increases in
productive efficiency which in turn have been used to pay for investment and
research, subsequently increasing the economys dynamic efficiency.
Deregulation through the removal of barriers to entry can also lead to more
innovation in both the public and private sectors.
Having said that, privatisation lacks the incentive to maximise net social benefit,
creating inequality of service, and may lead to market failure. In reference to the
IMF loan requirement for water privatisation in sub Saharan African countries,
privatisation meant that water tariffs are set at a market price that is far beyond
the means of poor families, leading to many cases of water borne diseases.
Private companies would not be concerned with producing public goods for
societal benefit, due to the profit motive.
Private monopolies can also lead to exploitation of that position, charging high
prices while restricting output, leading to a loss of allocative efficiency and
competition. For example, the US government sought to regulate the anticompetitive behaviour of monopolies with the Sherman Antitrust Act passed in
1890. However during Reagans term the top four meatpacking companies were
allowed to merge. The four companies slaughtered 21 percent of the nations
cattle during the 1970s. Now, their share constitutes 84% of USs cattle,
bankrupting numerous small, independent ranchers.
The deregulation of the private sector can similarly create negative externalities
as private companies might not be subjected to environmental concern as much

as nationalised companies. On the other hand, nationalised companies might be

exempted by the state. Which would similarly create negative externalities.
The privatisation of certain functions, however, can be argued to be worthwhile.
For example, the privatisation of British Airways, British Aerospace, British
Telecom, and the gas and electricity industries, among others; have led to
increased efficiency and competitiveness. Most private industries are regulated,
hence maintaining its allocative efficiency by preventing exorbitant prices and
monopolies. In the UK water industry, they are only allowed to raise their prices
by bringing the water management standards up to those set by the EU.
Privatisation also resolve the problem of overmanning in these industries while
reducing costs for the consumers.
However, functions such as education, where it is considered a public, merit
good is more suitable to be nationalised for the purpose of equality and fair
distribution of resources. Healthcare, such as the NHS, similarly, is better suited
for the public sector. Free provisions reduce inequality in society, and is hence
unsuitable for privatisation. In most countries railways and water supplies are
also nationalised as it makes little sense in duplicating such services because of
the high costs of establishing that provision. As with certain strategic services
such as railways, bus services, and airports to be in the hands of the public.
In conclusion, the transfer of certain functions to private sector has indeed
increased their allocative, productive, and dynamic efficiency due to increased
competition, cost conscious practices, and incentive to innovate. And certain
other functions should remain in the public sector due to risks of market failure,
unhealthy monopolies, and inequality in distribution.