3.6 Government Intervention Flashcards
examples of how firms privatise
- sale of state owned shared in companies
- contracting out of services previously provided by the state
- selling of individual state assets
- deregulation
what are the aims of privatisation
- improve efficiency - x-efficiency
- improve quality & range of services
- lower prices - competition
- widening of share ownership
- revenue raising
- global competition
how is privatisation successful
- rasing gov rev
- loss making firms start to make profit
- state owned firms are no longer such a burden
arguments for privatisation
- private companies have a profit incentive to cut costs and be more efficient and raise productivity
- government gains rev from sale of assets
- state monopoly is replaced by multiple firms leading to lower prices
- create shareholder democracy
- reduce the public sector net cash requirement
successfulness of privatisation in the energy sector (UK)
- real prices fell in the 1990s
- major price rise since 2008 - believed to be due to tacit collusion
- customer intertia = loss of welfare
successfulness of privatisation in the water sector
- bills risen significantly since 1989
- OFWAT reduced customer’s bills due to large efficiency improvements
- OFWAT prevented water providers from raising prices by 18% in 2004 due to supposed efficiency gains
successfulness of privatisation in the rail sector
- regulated rail fares rose in real terms since 1997
- standard of service worsened
- recently = improvements to track infrastructure as investment has begun to pay off
- lots of gov investment
arguments against privatisation
- social objectives hold less importance
- some activities are better run by the state as they are strategic parts of the economy
- gov loses out on dividends from future profits
- shares are often bought by large institutions
define nationalisation
the transfer of a major branch of industry or commerce from private to state ownership or control
arguments for state ownership
- target social objectives
- charge lower prices - not focused on profit max
- natural monopolies = economies of scale
- used to hit macroeconomic aims
arguments against state ownership
- absence of shareholder pressure = diseconomies of scale
- x-inefficiency
- lack an incentive to innovate
- losses of state-owned firms are absorbed by taxpayers = budget deficits
- suffer from the principal-agent problem and moral hazard
3 duties of regulators
- make the firm act as if they were in a competitive market
- once there is a competition the regulator has to consider price
- they will seek to reduce the barriers to entry and exit
what is price capping
regulators can set price controls to force monopolists to charge a price below profit maximising price
how do regulators determine the price cap
RPI - X + K
RPI = the retail price index (measure of inflatikon)
X = the efficiency gains that the regulator has determined can reasonably be achieved by the firm
K = the additional capital spending that a firm has agreed with the regulator is necessary
advantages of price capping
- firms are allowed to keep any profits they make if they improve efficiency to a greater level
- X or K factor is in place for 5 years, firms can plan ahead and know that they will not be penalised for making further efficiency gains
disadvantages of price capping
- setting the future X and K is difficult
- dependent on firm has to provide accurate information about its costs to the regulator
- if X is set too high then the company will have insufficient funds to invest and standard of service will fall
- if x is too low then excessive profits will be earned - used to invest in areas the regulators can’t control
- length of time - if X is set for too long then changes in market conditions cannot be taken into account
- if X is set too short and there isn’t enough of a time scale it will be difficult for companies to plan ahead with long term investments
- sometimes the regulator and the regulated industry have built up a close relationship the regulator may be less strict on the firms under its control
what is a way of profit regulation
rate of return of capital employed
what does rate of return do
used where prices are set to allow coverage of costs of production (normal profit) and to earn a ‘fair’ rate of return on capital invested
aims of rate of return
- encourage investment
- prevents firms from setting high prices
criticisms of rate of return
- no profit motive = efficiency up to a certain point
- firms aren’t rewarded for their success = penalised for it and encouraged to make limited profits
- firms are encouraged to overstate the value of their capital to ensure that they can increase the rate of return on their investment - increasing their profits - imperfect information
what are performance targets
- regulators can set performance targets that it will then monitor
- these may be based on improvements in the quality of service or reductions in the number of customer complaints
- may be supported by a system of fines should the firm fail to meet the targets/rewards if the firm meets them
how to judge the effectiveness of regulation
- impact on real prices to customers
- levels of competition
- employment and productivity levels
- quality of service
- investment levels
- how far has the regulator been able to adapt to changes in market conditions and technology
- comparing a firm to the rest of the industry
what is the aim of competition policy
- technological innovation which promotes dynamic efficiency
- effective price competition between suppliers
- safeguard and promote the interests of consumers through greater choice and lower prices
what are the 3 main pillars of UK competition policy
- anti-trust & cartels
- market liberalisation
- merger control
what are anti-trust & cartel policies for
eliminating agreements that restrict and impede competition including price fixing by firms with a dominant market position
what is the aim of market liberalisation policies
introducing competition in previously monopolistic sectors
what is the aim of merger control policies
investigation of mergers and take-overs which could result in firms dominating the market
