Direct government provision
| The existence of externalities provides an important argument for the common ownership, or nationalisation of a number of key industries. |
The argument is that privately owned firms, in order to survive in a competitive world, necessarily have to put their own interests before those of society as a whole. This harsh reality of the market is likely to manifest itself in the generation of negative externalities such as pollution. The self-control of these externalities would involve higher costs and an adverse impact on profits. Conversely, production activity which had net positive externalities on society will not be undertaken in sufficient quantities.
Nationalised industries, on the other hand, which, on account of being commonly owned, could be operated according to broad social criteria, rather than the narrow commercial one of private profitability. This allows for the possibility of externalities to be fully incorporated into production decisions. Thus, for example, questions of workers' safety standards and atmospheric pollution could be accorded priority status, and internalised. Profit maximisation would cease to be the goal.
Similarly, an important argument for merit goods such as education and healthcare being directly provided by the government rather than through the market, is that they not only have private benefits but also have significant positive externalities on society as a whole which individuals would tend to ignore when making their consumption decisions.
As a result, left to the market, under-provision is likely to occur; for example, individuals would be prepared to buy education through the market if they had to, as substantial private benefits, such as higher life-time earnings, are likely to result. However, a case for a higher level of government provision can be made on the grounds that not all the benefits accrue solely to the individual - society gains from a more efficient and adaptable labour force and perhaps a more tolerant and more socially aware population. The topic of such merit goods will be considered in more detail.
The above arguments for direct government provision would of course be strongly contested by free market economists who would argue the case for privatisation, the desirability of using markets to provide merit goods and the extremely poor record of pollution control of the formerly centrally planned economies of Eastern Europe.
