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nationalizationThe public ownership of industry. In a CENTRALLY PLANNED ECONOMY, most or all of the country's industries are owned by the state, and resources are allocated, and the supply of goods and services determined, in accordance with a NATIONAL PLAN. In a MIXED ECONOMY, some industries are owned by the state, but the supply of the majority of goods and services is undertaken by PRIVATE-ENTERPRISE industries operating through the MARKET mechanism. The extent of public ownership of industry depends very much on political ideology, with advocates of a centrally planned economy seeking more nationalization and private-enterprise proponents favouring little or no nationalization. For example, in the UK a Labour government nationalized the iron and steel industry in 1949, having previously nationalized the Bank of England, civil aviation, transport, electricity and the coal and gas industries. The iron and steel industry was denationalized by a Conservative government in 1953, but later a large part of the industry was renationalized by a Labour government in 1967. In 1980 a Conservative government embarked on a major denationalization programme, including British Steel (see PRIVATIZATION).
The main economic justification for nationalization relies heavily on the NATURAL MONOPOLY argument: the provision of some goods and services can be more efficiently undertaken by a monopoly supplier because ECONOMIES OF SCALE are so great that only by organizing the industry on a single-supplier basis can full advantage be taken of cost savings. Natural monopolies are particularly likely to arise where the provision of a good or service requires an interlocking supply network as, for example, in gas, electricity and water distribution, and railway and telephone services. In these cases, laying down competing pipelines and carriageways would involve unnecessary duplication of resources and extra expense. Significant production economies of scale are associated with capital-intensive industries such as iron and steel, gas and electricity generation. In other instances, however, the economic case for nationalization is far less convincing: industries or individual firms may be taken over because they are making losses and need to be reorganized or because of a political concern with preserving jobs. For example, in the UK, the British Leyland car firm and British Ship-builders were nationalized in 1975 and 1977 respectively, only to be returned to private enterprise in the 1980s.
A private-enterprise MONOPOLY could, of course, also secure the same efficiency gains in production and distribution as a state monopoly, but the danger exists that it might abuse its position of market power by monopoly pricing. The state monopolist, by contrast, would seek to promote the interests of consumers by charging ‘fair’ prices. Opponents of nationalization argue, however, that state monopolists are likely to dissipate the cost savings arising from economies of scale by internal inefficiencies (bureaucratic rigidities and control problems giving rise to X-INEFFICIENCY), and the danger is that such inefficiencies could be exacerbated over time by governments subsidizing loss-making activities.
The problem of reconciling supply efficiency with various other economic and social objectives of governments further complicates the picture. For example, the government may force nationalized industries to hold down their prices to help in the control of inflation, but by squeezing the industries’ cash flow the longer-term effects of this might be to reduce their investment programmes. Many of the nationalized industries are charged with social obligations; for example, they may be required by government to provide railway and postal services to remote rural communities, even though these are totally uneconomic.
Thus, assessing the relative merits and demerits of nationalization in the round is a difficult matter. From an economic efficiency point of view, under British COMPETITION POLICY, nationalized industries can be referred for investigation to the COMPETITION COMMISSION to determine whether or not they are operating in the public interest. See MARGINAL COST PRICING, AVERAGE COST PRICING, TWO-PART TARIFF, PUBLIC UTILITY, RATE-OF-RETURN REGULATION, PRIVATIZATION.