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International Handbook on Privatization

Edited by David Parker and David Saal

Privatization has dominated industrial restructuring programs since the 1980s and continues to do so. This authoritative and accessible Handbook considers all aspects of this key issue, including: the theory of privatization; privatization in transition, developed and developing economies; as well the economic regulation of privatized industries.
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Chapter 26: Restructuring, Regulation and the Liberalization of Privatized Utilities in the UK

David Saal


David Saal Introduction A substantial proportion of the firms that have been privatized in the past 20 years had originally been nationalized because they were considered to be natural monopolies. Especially in Europe, it had been generally accepted that, because of the problem of controlling market power, the efficient operation of natural monopolies was most likely to be achieved under state ownership. Consequently, when the recent privatization and liberalization of utility industries is placed in historical perspective, it must be seen as a particularly radical departure from the previous economic consensus, a departure that not only rejected the need for state ownership, but also rejected the very idea of natural monopoly as it had been previously conceived. This radical change occurred because the advocates of utility privatization had concluded that in many cases firms that had been previously considered a natural monopoly could in fact be broken up. Thus it was now believed to be both theoretically and practically possible to separate potentially contestable activities from the essential facility or network that was the source of the state-owned firm’s natural monopoly. Moreover, it was also believed that this restructuring would result in a substantial improvement in economic efficiency, because efficiency in the new contestable market could simply be achieved through competition. Thus only the rump natural monopoly essential facility would need to be regulated. However, this result was dependent on whether a former state-owned utility could actually be successfully restructured to facilitate competition after its privatization, and...

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