Merits and Demerits of Nationalization

Merits and Demerits of Nationalization


Nationalization refers to the taking over of certain industries or companies by the state. Nationalization is often prevalent in developing countries and can occur for a variety of reasons. Most often, governments turn to nationalization as a method to increase their power and resources.

Is nationalization good or bad for an economy? To find an answer to this question, let us examine the merits and demerits of nationalization.

Nationalized industries benefit from economies of scale and therefore would be in a position to provide goods and services to consumers at lower prices.

Furthermore, a monopoly owned and run by the government will take decisions in the best interest of consumers and will prevent consumers from being exploited. In a case where a monopoly is under private ownership, then the owners will run the monopoly with the sole aim of maximizing profits; therefore, there is a possibility for consumers to be exploited as a result of arbitrary price increases. This situation will be avoided if the monopoly is brought under the government.

Through nationalization of important industries, the government will be able to exert control over these industries. For example, nationalization of electricity provision will benefit the citizens of the country as the government will ensure that this facility is made available to all parts of the country, even in areas where it is unprofitable to do so. A private electricity company, however, may not provide electricity to areas where it deems unprofitable.

With industries that require centralized planning and control, nationalization is the best option; for example, the establishment of a national rail network. In such cases, nationalization will lead to a more organized and coordinated service.

Companies run by the government take social costs (e.g. pollution) into consideration. Nationalized industries would take steps to minimize or eliminate such social costs, whereas private companies would not be inclined to do the same. 

The profits made by nationalized industries will go back to the people.

The biggest drawback of nationalization is low performance and lack of efficiency of government run industries. Since these industries or companies do not operate under a profit motive, this means that they have no incentives to decrease their costs and improve their performance. For example, if fire fighting was exclusively a national industry then governments may run their fire departments inefficiently and not provide them with proper fire fighting equipment in Melbourne, thus leading to poor performance.

Furthermore, if the nationalized industry or company is a monopoly, they will have no competition and this will further demotivate them from taking steps to increase their efficiency and performance. Feel free to go over at this site  to know more about fire safety and maintenance. 

When industries are owned by the government, this creates room for corruption in how these industries are run. Example: favouritism in hiring practices.


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