LS17- Competition, Protecting Suppliers and Workers Flashcards
(23 cards)
What is an SME?
- small and medium enterprise e.g. a local, independent pizza takeaway business
- SMEs outnumber large companies by a wide margin and employ many more people
What is a start-up? + e.g.
- a company initiated by an entrepreneur to develop a scalable business model
- refers to new businesses that intend to grow large beyond the solo founder
- e.g. Uber, AirBnB
Benefits of small-businesses and start-ups
- increased competition
- jobs are created
- choice is increased for consumers
- source of export revenue
- seed-bed for innovation
- may be more innovative, flexible and quick to changes in market conditions and reacting well to different needs and wants of customers
What problems do SMEs face?
- credit (riskier for banks to give them loans)
- business skills
- recruitment
How can government support start-ups and SMEs?
- provide information on how to set up businesses
- deregulate to reduce barriers to entry
- provide training and education reforms
Competitive tendering + 2 benefits of it
- when private-sector firms compete to win contracts to perform tasks on behalf of the government - government chooses who they believe provides best quality and cost
- introducing the profit motive to economic activity previously performed by the state should lead to an increase in efficiency and quality
- the taxpayer should benefit from improved and/or cheaper public services
Downsides of competitive tendering
- if gov focuses too heavily on price, quality of key public services may decline
- the contracts often only have a few bidders therefore competition is limited
What loss do the government face when they support start-ups?
opportunity cost
Privatisation
when a firm or whole industry changes from being run by the public sector to the private sector - governments enact this change e.g. thatcher’s conservative governments
Why do supporters of privatisation argue that it increases efficiency?
- introduces the profit motive and competition
- therefore firms will, in theory, seek to reduce costs and improve quality to maximise profits -> dynamic efficiency -> lowers long term prices and boosts consumer surplus
- gov gains rev from sale of assets (can be reinvested) e.g. royal mail - however, often sold too cheaply
Which industries have been privatised in the UK?
e.g. rail, energy, water
Disadvantages of privatisation
- despite profit motive, poor regulation and/or natural monopoly conditions worsen outcomes for consumers - above inflation price rises in rail and energy markets are evident of this
- social costs ignored e.g. rural public transport networks closing or being heavily reduced
- gov loses source of revenue + sometimes sold for too low e.g. royal mail
- dynamically inefficient as profits may go to dividends for shareholders or perks etc
Private Finance Initiative (PFI)
- government takes competitive bids and then buys a whole investment package e.g. construction of a hospital
- gov pays back cost over a set period of time
PFI advantages
- private sector believed to be more efficient
- extra funding can kick-start more projects e.g. 22 NHS trusts use PFI -> econ growth, increased productive capacity
- PFI firms pay tax making it cheaper for gov in theory
- private sector not paid until asset delivered
PFI disadvantages
- financing costs of PFI are typically 3-4% over that of gov debt - some estimates found that paying off £1bn through PFI cost taxpayer equivalent to a direct gov debt of £1.7bn
- poor value for money - some infrastructure not designed to last more than length of contract
- high administration costs on advisors and lawyers - estimate of >£11m for a PFI hospital
Deregulation
- the removal of government regulations
- became a popular policy tool for economic liberals within conservative and labour parties from 1980s onwards
Some sectors most affected by deregulation
financial markets, public transport, postal services
How will deregulation affect the contestability of a market?
It should increase the contestability of a market as it reduces barriers to entry or exit
Advantages of deregulation
- downward pressure on price due to increased competition
- higher levels of innovation as less restrictions
Disadvantages of deregulation
- market stability - can lead firms to take excessive risks and load up on debt
- public safety - may lead to deterioration in public safety e.g. Grenfell Tower
Counter the argument that the profit motive drives efficiency + example
- it might drive inefficiency through the form of product obsolescence - the creation of products with purposefully frail designs to artificially limit their timespan and therefore force consumers into buying another product despite not actually needing one
- e.g. apple airpods tend to have a short lifespan due to glued components and difficult-to-access battery
Negatives of nationalising a services industry
- no profit motive + lack of competition-> weaker incentives for innovation or responsiveness to consumer preferences
- even if nationalisation increases service stability, it may come at the cost of lower productive efficiency as no profit motive, where resources are not used at the most cost effective manner - government may have to pay more in subsidies, increasing the burden on taxpayers who do not use rail services
- opportunity cost - may divert funds from other public services
Points for why a services industry should be nationalised
- market failure associated with a natural monopoly (high costs, service unreliability) - nationalisation allows for EoS as larger market share
- public interest and equity - nationalisation ensures the industry works in the public interest and not just for profit -> fairer pricing -> social benefits
- reinvestment of profits - not money going to shareholders so more dynamic efficiency, improving service quality
