Essays Flashcards
(13 cards)
Give a key piece of evidence of market failure in the UK water industry
Thames water: 3500 sewage spills between 2013-2022
Why is it good that the UK water industry is a natural monopoly?
- large economies of scale
- one firm has lower costs as it can exploit more economies of scale, therefore lower prices for consumers and more profits for producer
Describe an economy of scale in the UK water industry
- high upfront costs
- technical economies of scales - pipes
- bulk purchasing of chemicals
What regulation exists in the UK water industry and who implements it?
- ofwat
- environment agency
Evaluate the view that naitonalisation is the best course of action for the uk industry
Point 1: Pro nationalisation
- lack of competition due to natural monopoly therefore high prices and poor quality
- more likely to be allocatively efficient. Social welfare>pMax
- internalising of externalities - better investments in infrastructure
Eval 1:
- govt management may not be that goods - historically there has been inefficiency and lack of innovation
- costly for tax payers - increased bail outs
- disrupt investment and cause uncertainty
Point 2: Against nationalisation
- since privatisation, the UK water industry has seen significant investment (£160bn - leading to improvements in service quality and infrastructure)
- more profit motivation to innovate and minimise costs (prod, x, dynamic efficiency)
- ofwat can set max prices and enforce standards - can address issues
Eval 2:
- regulatory capture - not effective - have to improve regulatory practices
-
To what extent are subsidies more effective than minimum prices in supporting farmers?
Point 1: Subsidy
- lower cost of prod, increase q, increase p surplus, greater revenue
- more dynamic efficiency, less food waste
Eval 1: over reliance leads to inefficiency - less encouragement for farmers to lower their own cost of production - may encourage subsidies to be reused on investment
Point 2: higher prices - more revenue - may be used within a buffer stock scheme
Eval: regressive, harder for Lower incomes to buy more nutritious food
Evaluate the view that perfectly and monopolistically competitive markets achieve allocative efficiency but not dynamic efficiency
Point 1: perfectly competitive
- always allocatively efficient
- unable to make supernormal profits as new entrants will enter and raise supply, lowering prices
Eval 1: very unrealistic
Point 2: monopolistically competitive
- a bit allocatively inefficient (not at p=mc)
- more dynamically efficient due to boe
- but profits competed away in long run
Eval 2: depends on differentiation on products, may not reinvest so therefore not dynamically efficient
What is the current minimum wage?
- recently raised to £12.21/hour in 2025
- UK NLW has risen faster than CPI inflation and average wage growth
Evaluate the case for continuing to raise the national living wage in the UK
Point 1:
- pos effect on minimum wage workers -> effect on inequality, living standards, degree of protection
Eval 1: must be raised in line with inflation otherwise no effect on inequality as other workers are likely to also have pay rise
- may even lead to job losses
Point 2: shut down of small-medium firms, leading to unemployment and reduced competitiveness, less allocatively efficient and dynamic
Eval 2: depends on % of workers on nLW (investment bankers)
What are cases against nationalisation?
- historically nationalised firms have a history of being badly run by the government
How much has the water industry seen after being privatised?
£160bn
Evaluate, with examples, the extent to which government failure is a common outcome when governments intervene in markets.
Point 1: Common in partial markets
- partial market failure: still a market but the market doesn’t lead to a socially efficient outcome (e.g externalities, information failure)
- App: tobacco tax -> informal market for cigarettes/ water regulation -> ofwat regulatory capture/ info gaps with costs of Thames water -> setting wrong price caps
Evaluate: quality of information
- regulatory should have expertise in the industry they are regulatory
- if market failure is small to begin with: may not worth intervening due to the risk of making it worse being high
Point 2: complete market failure: missing markets for public goods
- flood defences
- market failure is so large - risk of government failure is much lower, any public goods are better than a complete absence
Eval 2: high cost of providing the good, due to no profit there is a lack of incentive to minimise costs
- leading to inefficencdies
- private tendering!!!!
- opp cost
Discuss the extent to which monopsony firms always impose costs on consumers. Refer to a firm or industry of your choice in your answer. (25 marks)
P1: - Lower costs mean lower prices passed on to consumers, meaning greaterr allocative efficinecy
E1: - may not pass on lower costs (profits)
P2: supplier so it the market - less choice/less innovation - exploitation - higher prices long run
E2: - suppliers can find alternate suppliers (foreign markets) or corporatise agreements
