3.6 - Government intervention Content Flashcards

Question

# 3.6 - Government intervention What is the advantages of Privatisation

Answer 1

* Profit motive and competitive pressure prevents x-inefficiency, ensures low prices and high quality. * Cost savings can be passed to consumers or used for investment (dynamic efficiency) * Consumer has choice between providers -> quality and price (increased allocative efficiency) * Government no longer has to cover firm losses. * Government gains revenue from sale of assets * If a state monopoly is replaced by a few firms this will lead to lower prices. The competitiveness of the macro economy may improve * Privatisation can create a shareholder democracy via greater share ownership

Answer 2

* **Profit Maximisation → Higher Prices**: Private firms in natural monopolies (e.g., railways, water) raise prices to maximise profits, unlike state-run firms that prioritise affordability. * **Service Quality Decline**: Cost-cutting (e.g., maintenance reductions) lowers standards (e.g., 32% UK train delays in 2022) and safety (e.g., 2002 Potters Bar crash). * **Abandonment of Unprofitable Services**: Firms "cream the market," axing essential but loss-making services (e.g., rural bus routes post-deregulation). * **Loss of Government Revenue**: Firms sold below market value; profits go to shareholders, not public reinvestment (e.g., UK rail dividends vs. taxpayer subsidies). * **Neglect of Social/Strategic Needs**: Profit motives override public good (e.g., underinvestment in infrastructure). Critical sectors (water, railways) risk instability under private control

Answer 3

A procurement process where governments outsource projects (e.g., schools, hospitals, HS2) to private firms via bids. Firms compete to offer the lowest cost/highest quality, with the contract awarded to the best bid. Key Benefits: * Lower costs: Profit motive drives firms to minimize waste (reducing X-inefficiency). * Higher quality: Private sector expertise often exceeds public sector capabilities. * Productive efficiency: Firms innovate to cut costs (e.g., faster methods, cheaper materials). * Taxpayer savings: Competition lowers prices, reducing fiscal deficits. * Innovation: Private firms adopt new tech/methods, unlike bureaucratic public hierarchies. * Avoids diseconomies of scale (DOS): Less risk of inefficiency from oversized government projects.

Answer 4

* Businesses bidding to win contracts might sacrifice quality of service as a way of lowering costs - leads to low quality, inadequate health and safety compliance * Doubts about some employment practices of service companies including low wages & poor conditions * Contracting out/outsourcing require proper monitoring which costs more * Bid rigging - firms collude so they don't undercut eachother when bidding. * Financial problems, bankrupcy may mean supplier won't deliver * Carillion went bankrupt after an £100m contract was awarded to build a new hospital in the midlands. * Bid low charge high - Crossrail was £6bn over budget. meant to cost 14bn. Cost over 20bn

Answer 5

* **Long-term investment**: Prioritizes public good over short-term profits; profits reinvested into services. * **Social welfare focus**: Lowers prices, guarantees universal access, and addresses externalities (e.g., pollution). * **Strategic security**: Protects vital sectors (e.g., energy, transport) from private exploitation/instability. * **Economies of scale**: Natural monopolies (e.g., railways) cut costs via state efficiency. * **Macroeconomic control**: Helps stabilize prices/inflation (e.g., capping utility costs).

Answer 6

* **Inefficiency**: * X-inefficiency (no competition → complacency/higher costs). * Soft budgets: Losses covered by taxpayers, encouraging waste. * **Stifled innovation:** No profit motive → loss of dynamic efficiency. * **Principal-agent problem**: Managers lack incentives to cut costs. * **Monopoly pricing**: Diseconomies of scale → higher consumer prices. * **Real-world failures**: * 1970s stagflation linked to nationalized industries. * NHS funding instability/lack of competition.

Answer 7

* Most natural monopolies (rail, water, energy, post) are privately owned in the UK * The government could nationalise them (buy them from their private owners and run them not for profit)

Answer 8

* Exploit Economies of Scale * Run at allocatively efficient point - lower prices and increased consumer surplus * Better service * More investment - not run for profit so extra revenue can be reinvested into the firm. * More tax revenue - government will have an income steam. * Democratic - electorate can scrutinise government perfomace

Answer 9

* X- inefficiency - no competition or profit motives. Encourages excessive and wasteful spending. Costs rise * Principal agent problem * Opportunity cost of using taxpayer' money - expensive to buy firms * Government run firms in the UK have made heavy losses and require taxpayer subsidies

Answer 10

1. Rail network is a natural monopoly suited to state control to achieve economies of scale 1. Rail fares can be controlled to improve affordability for rail passengers 1. Profits flow direct to the taxpayer rather than to shareholders of private train companies 1. State can direct investment into the network and borrow more cheaply to fund it

Answer 11

1. Competition on lines is more important than who owns the railways – therefore, allow more operators 1. Private sector firms are more likely to improve dynamic efficiency and avoid X-inefficiencies 1. Possible to regulate more fares on services run by private train operating companies 1. History of state-run railways in the UK (especially in the 1970s and 1980s) was not always positive

Answer 12

1. A successful UK rail industry is needed to sustain and improve competitiveness / support tourism 1. UK rail network is expensive to run – in part a legacy from the Victorian age. Huge investment needs – unlikely that the private sector can provide sufficient funds 1. Market failure issues are important such as positive externalities from encouraging an increase in mass transport/reducing traffic congestion, affordable rail, and geographical mobility of labour 1. Much of the UK rail industry is already under state control / or direct regulation of nearly half of fares, the Government sets terms of rail franchises awarded 1. Affordability of rail travel is a major issue although dynamic pricing cuts fares for many segments of the market (such as student rail cards and family travel cards)

Answer 13

**Productive efficiency** * Operating costs measured by cost per passenger kilometre travelled * Operating costs at peak and off-peak times * Capacity utilisation of the system – using up marginal spare capacity * Ability to benefit from economies of scale / avoiding diseconomies of scale **Allocative efficiency** * Ticket pricing – do prices reflect the marginal costs of providing a service? * Effects of price discrimination on consumer welfare * Peak and off-peak pricing **Dynamic efficiency** * Improvements to customer service – Wi-Fi, ticketing systems, apps, refunds * Reliability and safety of trains, frequency of service, customer service/information

Answer 14

* No corporation tax * Providing government grants up to £25k * Business rate (property tax) reduction * Removal of barriers to entry - e.g. licences. * Split up a monopolist - * Reduce their market power and economies of scale. * E.g. JD Sports and Footasylum in 2021 were forced to split up. * Prevent mergers and firms getting so large in the first place

Answer 15

* Labour is reforming business rates – so that 250,000 (out of 5.5m) small businesses get up to 40% off their rates * Tackling retail crime – funding for prevention and police training (£1.8 billion lost through shoplifting) * Labour confirmed £1 billion for British Business Bank to enhance access to finance for smaller businesses through Start Up Loans, the ENABLE build, the Growth Guarantee Scheme and the Life Sciences Investment Programme * Introducing Business Growth Service

Answer 16

* There 5.5m SMEs * Employ 60% of total workers in UK * Turnover of 52% of total = £2.2 trillion

Answer 17

Governments cap prices to stop monopolies from overcharging, making essential services (like water, gas, and electricity) more affordable—especially for low- and fixed-income households. They also push firms to become more efficient. However, high corporation taxes may force companies to pass extra costs to consumers.

Answer 18

Strict price caps limit a firm's profit margins and can restrict investment. On the other hand, lowering corporation taxes (e.g., a drop from 21% to 20% in the UK) helps firms keep more profit, though a 1% reduction may have only a modest effect overall.

Answer 19

Public sector firms are geared toward allocative efficiency—producing at the level where average revenue equals marginal cost—while private firms aim for profit maximization. Intervention can shift goals toward social efficiency, though market competition also drives productive and allocative efficiency in the private sector

Answer 20

Regulations ensure firms meet minimum quality standards (for instance, keeping vulnerable populations warm during cold weather). While profit-focused firms might sometimes cut corners, their expertise can also lead to higher quality if not overly restricted.

Answer 21

By regulating monopolies and supporting the growth of SMEs, intervention can widen consumer choice through increased competition. However, overly strict price ceilings might force suppliers out of the market, thereby reducing the variety and quantity of goods available.

Answer 22

Regulatory capture occurs when regulators, influenced by detailed company information, start acting in the companies' interests rather than protecting consumers. This bias undermines the effectiveness of government intervention.

Answer 23

Companies often hold more detailed information than regulators, making it difficult to set the right level for interventions like price caps. This imbalance can lead to poor policy decisions and misallocation of scarce resources.

Answer 24

ntervention can enhance social welfare by lowering prices, ensuring quality, and broadening consumer choice, yet it may also limit profits, reduce investment incentives, and suffer from issues like regulatory capture and information gaps.

Answer 25

Legal limit on bills that energy suppliers can charge

Answer 26

* Gas and electricity currently provide around 80-85% of UK fuel consumption. Coal is now less than 1% * The gas and electricity industry are an oligopoly. There are 70 active suppliers. The Big Six energy companies have more than 80% of the market * Households spend in total over £30 billion a year on energy * In 2024, 3.1 million people lived in households defined as in fuel poverty, where more than 10% of annual income is needed to maintain a reasonable household temperature * Big Six: Control 81% of gas supply and 80% of electricity 1. Centrica 1. EDF 1. E.ON 1. N-Power 1. SSE 1. Scottish Power

Answer 27

1. Cap protects consumers from over-charging due to the power of dominant suppliers who make high profits 1. High fuel bills hurt lower-income families who are at greater risk of fuel poverty – relatively poorer families spend a higher percentage of their disposable income on energy bills. 1. Price cap will encourage energy suppliers to increase productive efficiency (lower LRAC) to improve profits 1. The cap can be temporary & lifted if competition improves

Answer 28

1. Price cap might hurt competition by reducing profits and therefore lowering the incentive for new challenger firms to enter industry 2. Prices tend to gravitate towards the cap so average prices for customers might increase rather than fall 3. Fall in profit will mean less investment in renewables – operating profit of energy suppliers is only 5% 4. Better long-run strategy is to focus on nationwide housing insulation programme to improve energy efficiency

Answer 29

1. **Real Prices for Consumers**: Prices are falling in real terms (after inflation) so that consumers find a product more affordable 1. **Size of post industry profits**: monopoly profits are made and how much of these are reinvested into renewable energy research 1. **Jobs**: to what extent is regulatory intervention leading to gains in employment 1. **Performance targets** – such as the success/failure in meeting targets for service reliability in the rail industry, speed and efficiency when replying to customer complaints 1. **Research spending** – to what extent is the regulatory environment helping to sustain a high level of research and development spending to speed up the rate of product and process innovation 1. **Productivity improvements** – is extra competition driving higher the level of output per worker? 1. **Environmental indicators** – is regulation effective in improving aspects such as clean beach standards and safety of supply in the water and sewerage industry 1. **Investment in new capacity to meet future demand** – is the regulatory environment providing sufficiently strong incentives for the investment needed to cope with growing populations and rising real incomes? Telecoms, transport, and power are three industries with notably high levels of required investment.

3.6 - Government intervention Content Flashcards

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