3.6.1c - government intervention

Question 1

4 types of government intervention to promote competition and
contestability:

Answer 1

o enhancing competition between firms through
promotion of small business
o deregulation
o competitive tendering for government contracts
o privatisation

Question 2

Define competitive tendering

Answer 2

When a project is put out to tender so that firms can bid for the right to
provide the service e.g. laundry services in hospitals, tenders to maintain
public roads.

Question 3

Define deregulation

Answer 3

The opening up of markets to competition by reducing one or more barriers to entry. The aim is to increase market supply, stimulate
competition and innovation and drive prices down for consumers.

Question 4

Define nationalisation

Answer 4

The transfer of ownership of a company from the private sector to the government

Question 5

Define privatisation

Answer 5

The sale of state-owned companies to the private sector, normally through a stock market listing. The opposite of nationalization

Question 6

Define private finance initiative PFI

Answer 6

the PFI is a means of obtaining private funds for public sector projects

Question 7

Define renationlisation

Answer 7

Wen a business that had been once privatised is taken back into state ownership. For example, Directly Operated Railways, a state-run body,
rescued the East Coast main line after the collapse in 2009 of National Express’s franchise. Later, the franchise was returned to the private
sector – it was given to a consortium of Virgin and Stagecoach.

Question 8

Define patent

Answer 8

Right under law to produce and market a good for a specified period of time

Question 9

Why is privatisation supposed to increase efficiency

Answer 9

• introduces profit motive and competition so in theory, firms should reduce costs and improve quality to increase profit so efficiecy will improve

Question 10

Cons of privatisation

Answer 10

• Even with a profit motive, poor regulation and/or natural monopoly conditions are unlikely to result in improved outcomes for the consumer. The above inflation price rises found in rail and energy markets in recent years provide supporting evidence for this.
  o Social costs and benefits are more likely to be ignored. For example, this may lead to rural public transport networks closing or being heavily reduced thus reducing the connectivity of the areas.
• Some argue that it negatively affects that the PSNCR as firms are under-priced
  when they are sold and the government no long receives a firm’s profit. (lose tax revenue)
  o Infrastructure like the water supply and rail network is arguably better off under state control because it is vital to the national interest.; gov will not abused monopoly position if gov owns natural monopolies
• loss making services underprovided
• opening up natural monopoly means EOS gains are lost as comp is undesirable; productive inefficiency

Question 11

Advantages of privatisation

Answer 11

• REFER TO DAL DIAGRAM TO SHOW CONSUMER SURPLUS GAIN IN PRIVATISATION VIDOE
• greater competition, which reduces X-inefficiency, INCREASED AE and DE (gain comp advant) and ensures low prices and high quality as firms realise they need to be competitive.
• Managers become more accountable, since they know poor performance will mean
  a fall in share prices and/or shareholders wanting them to be replaced. - principal agent problem gone
• In both the long and short run, it can reduce the public sector net cash requirement (PSNCR) as the initial sale of shares raises revenue for the government and they no longer have to cover any of the firm’s losses.
• It reduces government interference which some see as a benefit in itself. This also
  means that firms can invest with greater certainty , instead of worrying about
  change when a government is elected every 5 years.
• if a state monopoly is replaced by several firms this will increase comp so prices are lowered and wuality improves

Question 12

What is a PFI

Answer 12

The government takes competitive bids for and then buys a whole investment project package such as the construction of a hospital. The government pays back the costs of the
whole project over a set period of time.

Question 13

Pros of PFI

Answer 13

1) Efficiency: private sector is better at managing investment projects and achieving overall cost efficiencies than the public sector

2) extra investment: Extra funding can kick-start more projects - bringing economic and social benefits. The PFI provides private sector funds for projects that might prove difficult for the government to finance through higher borrowing and taxes e.g. 22 NHS trusts use PFI for building. Projects supporting health or education will improve productive capacity, increase economic growth and can therefore be funded out of future incomes that the projects helpto generate

3) Delivery: The private sector is not paid until the asset has been delivered. New PFI projects are nearly all fixed price contracts with financial consequences for contractors if delivered late. PFI firms pay tax which in theory could make the projects cheaper overall for the government.

4) Dynamic efficiency: Private sector better placed to bring innovation and good design to projects, higher quality of delivery, lowering maintenance costs. The bidding process for PFI projects creates competition at point of tendering

Question 14

Example of PFI

Answer 14

refer to cgp page 96

Question 15

What are cons of PFI

Answer 15

debt costs:
+ Since 2007 the cost of private sector finance has increased - financing costs of
PFI are typically 3-4% over that of government debt.
-pfi hospitals: high costs of PFI debt charges means that the NHS can only operate anything from a third to half as many services and staff as it would have done had the scheme been funded through conventional procurement.
+ estimates find that paying off a £1bn debt incurred through PFI cost the UK taxpayer equivalent to a direct government debt of £1.7bn.
+ 2017 nuffield report: This year, total repayments will cost around £2.1 billion and will reach a peak in 2029

Inflexibility and poor value for money:
+ Long service contracts may be difficult / costly to change - especially when the management of a project seems to have gone wrong
+ Infrastructure may not designed to last more than the length of the contract and will need replacing or maintenance costs will be high.

Risk: The ultimate risk with a project lies with the public sector (government). Private finance agreements are complicated to organise and there is no guarantee that the private sector will make a better cost benefit analysis of a project than the public sector

• administration: High spending on advisors and lawvers and the costs of the bidding process.
  The Royal Institute of British Architects estimated that the cost of bidding for a PFI hospital was more than f11 million.

Dependence: Governments can become addicted to PFI - “the only game in town” rather than using government borrowing for key projects. The PFI has added to public sector debt but created many private sector fortunes

Question 16

Aim of deregulation

Answer 16

• Removing regulations can make both entry and exit to a market easier thereby raising contestability. This should increase the number of firms in the market.
• At the very least, incumbent firms will be more fearful of new entry. Consequently, competition is likely to increase thereby leading to greater efficiency and consumer satisfaction

Question 17

Contestabiliyt and deregulation

Answer 17

it increases contestability

Question 18

Pros of deregulation

Answer 18

Price: Deregulation can increase the contestability of a market. As a result, incumbent firms will be less inclined to profit maximise due to the greater threat of new entry and instead produce at p=mc. If deregulation does lead to a rise in the number of firms in the market, the increased level of competition will put downward pressure on price so increased allocative efficiency and productive efficiency

Quality: Deregulation will put pressure on incumbent firms to raise quality if it leads to a rise in contestability. This is because new entrants, or the threat of new entry, puts pressure on incumbents to raise quality in order to maintain their position in the market
.
Innovation: If deregulation makes it easier for new entrants to enter the market, the level of innovation is likely to increase as start-ups are more likely to be innovative and take risks. increased dynamic efficiency to gain comp advant as they will help reduce cost, reduce prcies and increase MS

Question 19

Cons of deregulation

Answer 19

• In financial markets it can lead firms to take excessive risks and load up on debt which can cause financial market failure. This was one important cause of the financial crisis in
• public saftey might deteriorate e.g deregulation was thought to have contriubted to grenfull tower disaster
• deregulating a market dominated by a natural monopoly means EOS gains lost and decreased productive efficiency, wasteful duplication of resources also means allocative inefficiency
• formation of oligopolies or local monopolies?

Question 20

another pro of pfi

Answer 20

• lower taxes in sr bc gov wont pay for the new facility immediately
• gov gains revenue from selling first (Eval: but royal mail wasn’t a good price)
• improved resource allocation bc privatised firms have to react ot market signals of supply and demand

Question 21

Define startup

Answer 21

A start-up is a company initiated by an entrepreneur to develop a scalable business model
examples of successful start ups: uber, ocado and airbnb

Question 22

Compare SME and national companies

Answer 22

SMEs outnnumber large companies by a wide margin and employ way more people

Question 23

Why do gov aim to seek and support SMEs and startup

Answer 23

• improve competitiveness of markets
• make it easier for entrepreneurs to set up businesses and for existing ones to grow, the number of firms that rise to challenge established firms will increase.
• the audit market in the UK is an oligopoly dominated by the Big Four:
  PwC, Deloitte, EY and KPMG. The government could try to help smaller auditors grow in
  order to increase competition.
• Consumers would be likely to benefit through increased
  choice and quality

Question 24

Benefits of small businesses

Answer 24

• They create competition.
• They create jobs.
• Choice is increased for consumers by their presence in the market.
• Some are a source of exports.
• Can be a seed-bed for innovation (particularly start-ups).
• They may be more innovative, flexible and quick in responding to changes in market
  conditions and reacting well to the different needs and wants of their customers

Question 25

Problems faced by start ups

Answer 25

• Credit - Banks view smaller businesses as a greater risk. This means that often small
  businesses struggle to find funding/affordable funding.
• Business skills - Some people feel they lack the skills and/or experience to succeed in
  business.
• Recruitment – Finding competent staff can be difficult even for large firms. SMEs often
  find it tricky to recruit suitable staff

Question 26

What can the gov do to support smes

Answer 26

• Provide information on how to set up businesses.
• Deregulate to make it easier to enter markets.
• Streamline the process for setting up and running a business.
• Provide training to help people gain business skills.
• Educational reform to increase the skills of the overall workforce.
• Provide business mentoring services e.g. experienced businesspeople offer advice to
  business people who are starting out in commerce.

Question 27

Purpose of competitive tendering

Answer 27

• The idea is that introducing the profit motive to economic activity previously performed by
  the state should lead to an increase in efficiency and quality. The taxpayer should then
  benefit from improved and/or cheaper public services.

EVAL: assumes there is a competitive market for gov contracts and that gov will be able to competently adminster contracts. Can be subject to regulatory capture

Question 28

Pros of competitive tendering

Answer 28

Increased competition: Competitive tendering encourages competition among suppliers, which can lead to better prices and improved quality.
Greater efficiency: By opening up government contracts to private companies, competitive tendering can encourage greater efficiency and innovation in service delivery.
Transparency: Competitive tendering promotes transparency in the procurement process, ensuring that contracts are awarded fairly and openly.
Value for money: Competitive tendering can lead to better value for taxpayers’ money by encouraging suppliers to offer the best possible price for their services.

Question 29

Cons of competitive tendering

Answer 29

• If the government focuses heavily on the price of contracts firms may respond by reducing
  quality. This is not ideal given these are public services e.g. the construction of a hospital.
• Firms involved in competitive tendering, referred to as outsourcers, often have the ability to drive a hard bargain in contract talks. This results from their large size and experience. Consequently, they are often more adept at negotiating contracts than the government. As a result, the taxpayer often ends up with poor value for money.
• The contracts the UK government puts out to tender often only have a few bidders. The
  lack of bidders means that competition is limited
• Privatization: Competitive tendering can lead to the privatization of public services, which some argue can undermine public accountability and transparency
• Bureaucracy: The competitive tendering process can be bureaucratic and time-consuming, which can increase costs and delay service delivery.
• Limited choice: Competitive tendering can limit the number of suppliers able to bid for contracts, particularly for smaller contracts, which can limit the range of services available.

Question 30

examples of promoting small business

Answer 30

The Red Tape Challenge aims to decrease regulation, particularly for small
businesses.
- There are also schemes, such as the Enterprise Investment Schemes and Seed Enterprise Investment Scheme, which provide tax relief for people who buy shares in small companies to help them grow.

Question 31

Examples of banning anticompetitive practices

Answer 31

• The Enterprise Act (2002) means firms engaging in these practices can be fined up to 10% of worldwide annual sales and those who organise cartels can face up to five years in prison and unlimited fines.
• In 2011, the 9 supermarkets in the UK
  were found to be fixing the price of milk and cheese products and Tesco alone was fined for
  £10 million.
• The problem is that it is very difficult to prove overt collusion and almost
  impossible to prove tacit collusion.
• so fines fro collusion and predatory pricing

Question 32

examples of competitive tendering

Answer 32

• Companies such as BAE Systems, Rolls-Royce, and QinetiQ have won competitive tenders for defence contracts in the UK.
• Private healthcare providers such as Virgin Care, Serco, and Capita have won competitive tenders for NHS contracts.
• Private transport companies such as Arriva, Stagecoach, and FirstGroup have won competitive tenders for transport contracts in the UK.

Question 33

What does success of privatisation depend on

Answer 33

• level of competition psot privatisation; competition may be low at first and take time to build up so productive and allocative inefficiences wille exist
• level of gov regulation; prevents monopolies and oligoplies from forming and ensure socially desirable goods and services are provided and firms forced to take into account external costs
• how do we classify success; from consumer, from gov or from firm?

Question 34

What does success of dergulation depend on?

Answer 34

• Short run vs long run: in the short run, contestability is increased but if oligopolies or monopolies form, this instantly reduces contestability in the long run so policy fails
• ehight of other barriers; legal barriers miimised but what about strategic, structual and brand loyalty
• level of gov regulation; this cna minimise oligopolies/monopolies