[Microeconomics] Nationalisation

Nationalisation: When the state takes ownership of [said private firm] and places it under [said state firm]. It sets P=MC to achieve Allocative Efficiency.

Pros

1. Less profit motive --> can produce at lower P, higher Q. Profit used for distribution of income.
2. Better position to reap iEOS (i.e. Organisational Economies). Pass on cost savings to consumer ITO lower P.
3. Govt has obligation to provide better quality service. [State relevant examples, i.e. higher train frequency]

Cons

1. Less profit motive --> doesn't produce along the LRAC --> Not productive efficient. Extra costs may spill over to consumer ITO higher P.
E: Govt with a good track record is likely to have strict regulations, reducing probability of govt inefficiency.
2. Lack of profit motive hinders innovation in service development and production methods. Consumers may not be able to enjoy lower price or [any other benefits] in the future. [State relevant examples, i.e. higher train frequency]
E: If there is reserve capital, govt can always choose to innovate to appease citizens.
3. High cost of nationalisation --> Funds from tax revenue used. The opportunity cost incurred from nationalisation may be more significant than its benefits. [State relevant examples of Opp Cost, i.e. funds can be used for other important aspects, such as education or defense]

Diagram

I'll upload one of my own if I have the time to do so. If not, use a diagram of a natural monopoly.

Output level Q is the profit-maximizing output level, where MC=MR. When nationalisation occurs, the government seeks to become allocative efficient (P=MC). Let's assume that the area on the diagram where the MR & AR curve meet on the y-axis is denoted as 'D'. The initial consumer surplus is denoted by Area DZP. After setting P=MC, the consumer surplus is represented by DAP1. 

At Q1, AC>P, meaning that the firm is reaping subnormal profits in the long run. It fulfills the shut-down conditions for the long run. However, if it shuts down, there is no service. Thus, the government will subsidize the firm to compensate for the subnormal profits so that it ends up making normal profit instead. When it reaps normal profits in the LR, it does not have the ability to innovate due to the high costs of innovation. Thus, the quality of the product offered by the firm may not improve significantly for the consumer.