Unit 6 Flashcards
(21 cards)
Privatisation
The transfer of assets from government to privately owned businesses.
Became increasingly popular since the 1970s.
Example of privatisation
The royal mail, energy, water
Benefits of privatisation
- Raising revenue for government
- Reduces public spending and government borrowing
- Promotes competition
- Promotes efficiency
- Popular capitalism
Drawbacks of privatisation
- Monopoly abuse
- Short-termism wins
- Ignoring externalities
Regulation
The creation of rules within an industry
Benefits of regulation
- Encourages firms to strive for productive efficiency through reduced costs
- Protects from monopoly abuse
- Ensures quality and choice are maintained in monopolistic markets
Benefits of Derregulation
- Competitive markets will lead to economic efficiency
- Productive efficiency & allocatively efficiency is created
- Less government intervention allows firms to produce to the needs of the market
Uk competition policy
Involved measures to enhance competition between firms in order to improve economic outcomes.
Currently overseen by the competition and markets authority (CMA)
How does Uk competition policy improve economic outcomes?
Through:
- Legislation
- Privatisation
- Deregulation
- Prevention of mergers
- Actions to prevent restrictive trade practices and abuse of monopoly power.
Main theoretical principles underpinning UK competition policy
- Ignoring economies of scale, perfect competition is more likely to be productively and allocatively efficient than a monopoly.
- Monopolists restrict output to raise prices and gain supernormal profits. This results in a net loss of welfare as consumer surplus is reduced and producer surplus is increased.
??
- If economies of scale is present, monopolies may produce output at a lower ATC than firms in perfect competition.
- Monopolies making abnormal profits can be more innovative and dynamically efficient than in perfect competition
(Generally each case is judged on its own merit)
What theory should be used to illustrate competition policy?
Contestable market theory
How can UK & EU competition policy be achieved?
- Cutting monopoly power
- Restricting mergers & protecting competitive markets
- Creating fairness in markets so that firms don’t abuse dominant positions
- Increase in productive, dynamic, static and allocative efficiency.
Costs leading to unsuccessful UK & EU competition policy
- Reduced creativity
- Stops some firms, particularly natural monopolies, from benefiting from huge EoS.
- Lead to gov failures as authorities created distortions in the market that caused inefficiencies.
Benefits to successful UK & EU competition policy
- Lower prices following outward shift in supply
- Improved quality
- Increased choices
- Innovation
- Possibly technological change
- Competitive advantage. This will help EU firms compete in a global market. Eg. against Chinese and Indian markets.
Public ownership
Provision of goods and services by the government
UK examples of public ownership
Education, health services, policing and the services, eg. the army
Nationalism
Occurs when the government take a privately owned business into public ownership
The UK saw mass nationalism, by the post second world war Government, from 1945 onwards
Reasons for public ownership/ nationalism
- Potential for huge EoS (lower prices and productive efficiency)
- More focus on service provision (Allocative efficiency, gov aim to maximise social welfare)
- Less likely to be market failures from positive and negative externalities.
- Public sector can be a vehicle for macroeconomic control. (gov could influence wages to control inflation for example)
Reasons against public ownership/ nationalism
- DEoS- control/ coordination etc.
- Lack of incentives to minimise costs. Complacent and wasteful production.
- Lack of supernormal profit. Less productive efficiency
- Expensive burden on the taxpayer- opportunity cost of using tax revenue in other ways.
- Higher prices due to low competition- allocative inefficiency.
- Greater risk of moral hazard- individuals taking risks don’t take on costs.
- Political priorities override commercial issues
Evaluations of public ownership
- Funding vs Delivery- Nationalism has huge costs, but if the end results in consumers getting increased public services is it worth while?
- Competition in the private sector may solve the problem.
- Role of regulation in the private industry
- Size of sector firms- if private sector firms are large and benefiting from EoS, might outweigh potential for DEoS when nationalising.
- Objectives of firms- not all private firms want to profit maximise, they could have an allocatively efficient or socially responsible objective.
