2. The Market Mechanism, Market Failure and Government Intervention - Types of Regulation Flashcards
What is privatisation?
This is when state-run sectors/industries are sold off to the private sector
What is the aim/idea behind privatisation?
The private sector have a profit motive so will run the industry more efficiently + there is more competition
What are the advantages of privatisation?
Increased allocative efficiencyReduction of x-inefficieny Efficiency incentive which drives dynamic efficiency
What are the disadvantages of privatisation?
Limited competition may occur - creating allocative and productive inefficiency Services that are making losses will be cut even if they’re socially desirable/importantLoss of natural monopolies and economies of scale - productive inefficiency
What does the success of privatisation depend on? (evaluation)
The lvl of competition after privatisationThe level of government regulation - strong = competitive, weak = not - gov. reg. may force firms to take neg. externalities into accountWhat is success? For consumers or producers?
What is deregulation of an industry?
This is when the government reduce the legal barriers to entry in given industries - incentivises more firms to enter the market - promotes competition - promotes efficiency
What are the advantages of deregulation?
More consumer choice - more need for allocative efficiencyGood chance of productive and x-efficieny occurring as they need to stay ahead of competitors
What are the disadvantages of deregulation?
Loss of natural monopolies may increase AC - lose productive efficiency and wasteful duplication of resources - allocative inefficiencyMay lead to the formation of oligopolies and local monopolies - no guarantee of competition
What does the success of deregulation of markets depend on?
Short-run v long-run - if oligopolies etc. form l-run markets won’t be contestable - policy failedHeight of other barriers to entry - deregulation only reduces legal barriers to entry, other barriers to entry may prevent competitionGov. regulation needs to be strong to prevent oligopolies etc. forming
What is nationalisation?
The process of taking an industry into public ownership
What are the arguments for nationalisation?
State = monopoly - potential for EoSPublic sector focuses on service provision - allocative effiecncyLess likely to get neg. externalities bc the gov. consider all social costsPublic sector can be a vehicle for macro - economic control - gov. can manipulate wages to control inflation
What are the arguments against nationalisation?
Risk of diseconomies of scaleLack of incentive to minimise costs - risk of complacency & wasteful production - x-ineffiecincyLack of SNP for reinvestmentV expensive - burden on taxpayerHigher prices bc of low competitionRisk of moral hazard - MH = individuals who take the risk don’t bear the costs of the risk if things go wrong - politicians happy to take risk bc they aren’t responsible for the costsPolitical priorities may override commercial issues - allocative inefficiency
What are the evaluation points for nationalisation?
Funding v delivery - may have high costs but if delivery improves maybe worth it (or not)Maybe Private Public Partnerships are better - best of both worlds - private profit motive + public social cost awarenessIs nationalisation necessary;What is competition like in the private sector and what are the size and objectives of private sector firms
