6.7 Micro Flashcards
What are the arguments for public ownership?
Greater productive efficiency through owning an entire industry leading to large scale economies, particularly in the case of natural monopolies
Strategic control of important industries believed to be essential in maintaining the economy e.g. energy
Economic welfare might be better catered for e.g. provision of loss making products for poorer people in society
Long term strategy e.g. investment plans unhindered by the vagaries of the market as short term profit to please shareholders is not seen as an objective
Government provision of, and a co-ordinated approach to, infrastructure e.g. roads, rail and energy provides positive externalities to all firms in the economy
Increased government revenues
What are some arguments for privatisation?
Greater productive efficiency as profit maximisation leads firms to cut average costs
Innovation is more likely as firms strive to increase profits and market share by meeting customer needs. This leads to dynamic efficiency
Allocative efficiency occurs as market forces ensure that goods and services are produced to meet the needs of the consumer
This leads to greater choice and lower prices as firms compete supernormal profits away
Increased competition rather than government monopoly leads to greater economic efficiency
What are some benefits about public ownership?
Taking account of externalities
Social welfare - more likely to produce at an allocatively efficient output
Strategic importance - ‘too big to fail’ leading industries remain nationalised as private industries may cut corners, seeking to maximise profits and cause closures affecting society
What are some negatives about public ownership?
Lack of dynamic efficiency - caused by subsidies from the government (tax) and a lack of pressure to maximise profits. The underinvestment may lead to inefficiency
Lack of expertise - best leaders found in the ;private sector where financial rewards are significantly higher
What are some benefits about privatisation?
Raises extra revenue for the government
Promotes competition
Promotes efficiency
Popular capitalism - greater share ownership by the general public may lead to greater pressure on firms to act in the public interest
What are some negatives about privatisation?
Exploitation of monopoly power
Short termism
Ignoring externalities
What is regulation?
Regulation the imposition of laws and rules which restrict market freedom, imposing additional costs on businesses.
What is deregulation?
Deregulation the removal of the laws and rules to increase efficiency of markets - removing red tape.
What are some arguments for regulation?
Protecting consumers against the abuse of monopoly power that would lead to higher prices, supernormal profits and allocative inefficiency
To create an environment that will encourage firms to strive for productive efficiency through reduced costs
This has been achieved through capping prices on firms, forcing them to cut cost in order to increase profit
To ensure quality and choice are maintained in monopolistic markets
To reduce the monopsonistic power of firms
What are some arguments for deregulation?
The creation of competitive markets will lead to economic efficiency
Productive efficiency is created as firms strive to reduce costs in order to compete effectively
Allocative efficiency is created as firms strive to meet consumer demand by reducing price and providing a greater range of products
Less government intervention allows firms to produce to the needs of the market
What is regulatory capture?
Regulatory capture occurs when an organisation set up to protect the interests of the public instead defends the interests of the industry that it was set up to regulate against
What is competitive tendering?
In order to create competition the government might allow private firms to bid for public sector contracts
Quality standards are set by government and firms are allowed to bid for these contracts
The firm that bids the lowest will win the contract as long as they meet the required quality standards
