@zaasmi said in BNK601 Quiz 1 Solution and Discussion:
All below mentioned are the disadvantages of nationalization EXCEPT:
By the late 1970s it became increasingly apparent that many of the industries nationalised between 1945 and 1951 were running into difficulties. The major problems that the industries faced were:
They were being managed ineffectively and inefficiently. The principal-agent problem is highly relevant to public sector activities given that the managers of the utilities were generally not required to meet any efficiency objectives set by the state. There was growing criticism that, because these industries were protected from competition, they had become increasingly ‘X’ inefficient.
Nationalised industries were also prone to suffer from moral hazard, which occurs whenever individuals or organisations are insured against the negative consequences of their own inefficient behaviour. For example, if a particular nationalised industry made operating losses, the government would simply cover those loses with subsidies. Knowing that the taxpayer would come to the rescue meant that the inefficient behaviour could continue. This is, perhaps, the most significant criticism of the recent ‘bail out’ of failing banks. Given that they know the taxpayer will bail them out this may be an encouragement to continue with their inefficient and highly risky lending activities.
In addition, the nationalised industries had limited scope to raise capital for long term investment and modernisation because they would have to compete with other government spending departments, like education, health and defence. The result was a prolonged period of under-investment in these industries.