Theme 3.6.1 Part 2 Flashcards
Define deregulation
When govs reduce legal barriers to enter given industries (incentivises firms to enter the market - promoting competition- promoting efficiency)
Explain the advantages of deregulations
More firms =⬆️ consumer choice - incentive for firms to be A.E to satisfy consumers and ensure they’re ahead of competitors
⬆️ productive & X efficiency- incentive for firms to minimise costs and max profits to stay ahead of competitors (desirable to reduce waste and produce at the minimum point of AC curve)
⬆️ in D.E - highly competitive markets - profits made- reinvested in new products, R&D , innovation - overtime firms can reduce cost & prices and gain market share
Explain the disadvantages of deregulations
Formation of oligopolies and local monopolies- no guarantee that huge levels of competition will be everywhere in a given country - they may abuse power and charge higher prices with lower quantities - allocative & productive inefficiency
Loss of natural monopoly - increase in AC, decrease in P.E (as the E.O.S benefits aren’t seen anymore as more firms have entered the market) & wasteful duplication of resources -> with a natural monopoly it makes sense for there to be one major firm dominating the provision resources for that market however deregulating the market (allowing more firms to duplicate those resources) can result in waste —> Allocative inefficiency (doesn’t meet consumer demand as it’s unnecessary)
What does the effectiveness of deregulation depend on? (Evaluation)
Level of gov regulation - needs to be strong to regulate against anti-competitive behaviour and ensure the formation of local oligopolies and monopolies don’t occur.
Height of other barriers- no guarantee that because the legal barriers are removed that firms will easily enter the market and the market will become more contestable- the technical/strategic etc barriers to entry could still be very high —> disincentives firms from entering the market and you won’t see a huge increase in competition
What are the 4 ways the government may intervene to promote competition and contestability?
enhancing competition between firms through promotion of small business
deregulation
competitive tendering for government contracts
privatisation
How can the government intervene to promote small business to promote competition and contestability
Give training and grants to new entrepreneurs + encourage small businesses through tax incentives or subsidies. This will ⬆️ competition since they’ll be more firms within the market.
It ⬆️ innovation and efficiency since new firms are likely to provide new products and incumbent firms will no longer to be able to be X- inefficient.
AO2- Example of how the government may intervene to enhance competition between firms through the promotion of small businesses
The UK government offers schemes like Start-Up Loans and Business Rate Relief for small firms, making it easier for them to challenge larger, established companies.
Evaluation of promotion of small businesses
Small businesses often struggle to reach economies of scale, which can limit their ability to compete long-term.
Large incumbent firms may use predatory pricing or brand loyalty to squeeze new entrants out of the market, so promotion alone may not fully resolve competition issues.
Without strong demand or access to finance, small businesses may fail despite government support.
Describe competitive tendering
a process where businesses or government entities invite multiple firms to submit bids for providing goods or services, aiming to secure the best value for money. The firm that offers the best combination of price, quality, and efficiency wins the contract.
This method encourages competition, helping to drive down costs and improve service quality.
AO2- Example of competitive rendering
Local governments often use competitive tendering to award contracts for services like waste collection, ensuring taxpayer money is spent efficiently
Explain the advantages of privatisation
Increase in A.E -with more competition and a greater driver for efficiency, firms strive to produce g/s that consumers want and at a high quality - max consumer satisfaction
Reduction in X-Inefficiency - firms will need to drive down costs to remain competitive
Efficiency incentive which drives dynamic efficiency - for firms to gain an advantage/operate in highly competitive markets they’ll need to invest in D.E
Explain the disadvantages of privatisation
Higher Prices and Reduced Output: The firm’s shift to profit maximisation means prices rise and output decreases, harming consumers.
Allocative Inefficiency: The firm still produces at a price above marginal cost, leading to allocative inefficiency and deadweight loss, as some consumers are priced out of the market.
Quality vs. Profit Focus: In some cases, the firm’s focus on maximising profits may reduce the quality of service, especially if cost-cutting measures are implemented to improve profit margins.
What does the effectiveness of privatisation depend on?
The level of competition post privatisation- the greater the level the more effective it will be
Level of government regulation- as there’s limited competition, local Ms & Os form and if gov reg is tight there’ll be more competitive outcomes as opposed to if it’s lax we might see the existence of Ms & Os
Define privatisation
the transfer of ownership of a business or industry from the public sector (government) to the private sector
The idea is that the private sector will run them more efficiently as they have a profit motive and there’s greater efficiency through more competition that is allowed in the market
Name the 2 ways governments intervene to protect suppliers and employees
Restrictions on monopsony power of firms
Nationalisation
How does the government place restrictions on monopsony power?
Monopsonists are able to exploit suppliers by reducing prices. The gov can prevent these by passing anti-monopsony laws which makes certain practices illegal and can introduce an independent regulator who will force monopsonists to buy fairly.
Fines can be put in place for those who exploit their power and minimum prices may be introduced to ensure suppliers are paid a fair amount. Self regulation can also be used but this is weak.
Workers’ rights
The government protects employees through health and safety laws employment contracts we didn’t part processes maximum hours at work and the right to be in a trade union. The government may encourage firms to draw up codes of conduct related to employment practice.
The problem is that if workers is rights are too strong employers will be unwilling to take on new workers due to the extra cost of employee workers.
AO2 - Example of Privatisation- National Rail
A clear example of privatisation is the break-up and sale of British Rail in the 1990s, where the aim was to boost efficiency and service quality through market forces. However, due to limited competition on rail routes, regulation remained necessary to prevent consumer exploitation.”
Define nationalisation
when the government takes ownership and control of private sector businesses or industries, turning them into public sector organisations.
What are the aims of nationalisation?
Protect the public interest in essential services.
Ensure affordable prices and universal access for all (e.g. healthcare, water, rail).
Achieve allocative efficiency by focusing on social welfare rather than profit.
Allow for long-term investment without short-term shareholder pressure.
Give the advantages of nationalisation
Greater E.O.S- state run monopoly = greater potential of E.O.S= productive efficiency gains and lower AC = potential lower prices
More focus on service provision- govs will always look to max social welfare and societal needs/wants = A.E + at a low price which maxes C.S
Less likely to be market failure arising from externalities- govs will consider the full social cost/benefit when it comes to producing (in order to max social welfare) not just private cost/benefits = output levels will resemble the social optimum production level (society getting the exact qty they want- minimising under/over production that maybe taken place in the private sector) = more A.E
Give the disadvantages against nationalisation
Complacent and wasteful production (X-inefficient) - firms lack incentive to reduce costs as there’s a lack of profit motive - P.E and high prices for consumers.
Lack of supernormal profits - low D.E (no innovation etc) in comparison to when SNP is reinvested with private companies.
Greater moral hazard- managers/workers are protected from market failure by government backing. This reduces incentives to minimise costs, leading to inefficiency w/ the financial burden ultimately falling on taxpayers who fund any loses or subsidies.
Highly expensive and burden on taxpayer- buying the assets from private sector, maintenance, wages =$$ and the tax payer . In a period of national debt rn (£2.8 trillion) can the gov afford to nationalise industries like this? If they do- could there be better benefits/rates of return by using tax payer money elsewhere (OC).
Evaluation points of nationalisation
Funding Vs Delivery- nationalisation has huge costs that the tax payer has to share the burden on BUT if the end result is society getting a better delivery of key public services than in the private sector, it could be worth it (vice versa).
Size of private firm- if private sector firms are large and benefitting from huge E.O.S it can be argued that’s a benefit worthwhile keeping as opposed to going to nationalisation where firms might get too big and diseconomies of scale can creep in.
Objective of private firm- not all private sector firms profit max - some strive for A.E (not a concern)- , care about corporate social responsibility (good for society)- no guarantee that private sector firms looks to exploit consumers and harm public interest
AO2- Example of Nationalisation- Northern Rock 2008
In 2008, the UK gov nationalised Northern Rock, a British bank, during the global financial crisis.
The bank was struggling with liquidity after the collapse of the subprime mortgage market, and nationalisation was seen as necessary to protect depositors, maintain financial stability, and prevent a wider banking collapse.
