In many countries, the government chooses to "internalize" the monopoly by owning monopoly providers of goods and services. (In some cases these firms are "nationalized," and the government actually buys or confiscates firms that operate in monopoly

Question

markets). What would be the advantages and disadvantages of such an approach to ensure that the "best interest of society" is promoted in these markets? Explain your answer.

Answer 1

As long as the government "owner" pursues a production and pricing policy that approaches a competitive outcome, social well-being can be enhanced. In this case the government ownership would benefit society. However, in most cases, government owners operate much like private sector monopolists. The political economy of government institutions does not ensure that government owners will pursue socially optimal policy. Also, governments have no incentive to reduce costs or innovate.