8.8 Public Ownership, Privitisation, Regulation And Deregulation Of Markets

Question 1

What is public ownership?

Answer 1

Ownership of industries, firms and others assets such as other social housing by central government or local government

(The states acquisition of such assets is called nationalisation)

Question 2

What are publicly owned industries known as?

Answer 2

Nationalised industries

Question 3

How have labour governments justified nationalisation?

Answer 3

On the grounds that effective state planning required state ownership of the ‘commanding heights’ of the economy

-essential for efficient operations in key industries regarded as too important to be left to market forces

Question 4

What was public ownership used to do?

Answer 4

Regulate the problem of monopoly (particularly natural monopolies in the utility industries)

Question 5

What is privatisation?

Answer 5

The transfer of assets from the public sector to the private sector

Question 6

How many major industries have been privatised from 1981-2015?

Answer 6

15

Question 7

What are the 5 arguments for privatisation?

Answer 7

-revenue raising

-reduces public spending and the government’s borrowing requirement

-the promotion of competition

-the promotion of efficiency

-popular capitalism

Question 8

Case for privatisation as revenue raising?

Answer 8

-provides gov with a short term source of revenue when assets are initially sold

Question 9

Case for privatisation as reducing public spending and the governments borrowing requirement?

Answer 9

Post 1979 conservatives govs have aimed to reduce public spending and government borrowing

-privatising loss making industries reduces public spending and government borrowing also falls if private ownership returns these industries to profitability (increase in cooperate tax revenue)

Question 10

Case for privatisation as the promotion of competition?

Answer 10

Has been justified on the grounds it promotes competition through the break up of monopoly

(E.g at the time of their privatisation industries such as gas and electricity were natural monopolies but now there is significant competition through privatisation and regulatory bodies)

Question 11

Case for privatisation as the promotion of efficiency?

Answer 11

Supporters of privatisation believe that public ownership gives rise to special forms of inefficiency that will disappear once an industry moves to the private sector

(Business efficiency and commercial performance improved through the threat of takeover and the discipline of the capital market)

Question 12

Case for privatisation as popular capitalism?

Answer 12

-promotion in enterprise culture crucial-it extends ownership to employees and other individuals who hasn’t previously owned shares-thus added incentive for the electorate to support the private enterprise economy

(Proved to be a winning formula for conservatives and labour)

Question 13

What are 4 arguments against privatisation?

Answer 13

-monopoly abuse

-short-termism wins over long-termite

-selling the ‘family silver’

-free-lunch syndrome

Question 14

Case against privatisation: monopoly abuse?

Answer 14

Privatisation increases monopoly abuse by transferring socially owned and accountable public monopolies into weak and less accountable private monopolies

Question 15

Case against privatisation: Short-termism wins over long-termism?

Answer 15

When nationalised long term investments can only be profitable in the long term,

After privatisation these investments will not be made because company boards focus on short-termism and delivering dividends to keep shareholders and financial institutions happy

(Counter would be gov starved nationalised Industries of investment to keep government borrowing down)

Question 16

Case against privatisation: selling the ‘family silver’

Answer 16

Private sector businesses will sell its capital assets to raise revenue to pay for current expenditure, tax payers should not condone the sale of state owned assets

Question 17

Case against privatisation: The free-lunch syndrome

Answer 17

Opponents of privatisation argue state owned assets have been sold too cheaply

This is because offer prices of shares in newly privatised industries would be at a level which guaranteed a risk free capital gain(opposite of an enterprise economy)

Question 18

What is regulation?

Answer 18

The imposition of rules and other constraints which restrict the freedom of economic action in the market place

Question 19

What are the two types of regulation?

Answer 19

External regulation
Self regulation

(Both types can be imposed by law)

Question 20

What does a failure to comply with regulation result in?

Answer 20

Breaking the law(leads to fines or even imprisonment)

Question 21

What is self regulation?

Answer 21

Involves a group of individuals or firm regulating themselves(e.g through a professional association)

Question 22

What is external regulation?

Answer 22

Involves an external agency laying down and enforcing rules and restrains

(External agency could be a gov department or special regulatory body set up by the government such as the CMA)

Question 23

What is one reason governments use regulation?

Answer 23

To correct market failures and achieve the socially optimal level of production Nancy consumption

(Monopoly is also a form of market failure and regulation is used to limit and deter monopoly exploitation of consumers

Question 24

What is a good example of government regulation?

Answer 24

Reducing social costs of market activities such as consumer protection legislation and anti-discrimination and safeguards of workers rights

Question 25

What are the 5 advantages of government regulation?

Answer 25

Necessary to protect:

-environment

-workers from labour market exploitation

-people from self-harm

-children and old people from exploitation and abuse

-consumers from harmful products to maintain quality standards

Question 26

What is deregulation?

Answer 26

The removal of previously imposed regulations

Question 27

What are the two main justifications for deregulation?

Answer 27

-the promotion or competition and market contestability through the removal of artificial barriers to entry

-removal of ‘red tape’ and bureaucracy which imposes unnecessary costs on economic agents(particularly businesses)

Question 28

What does red tape mean?

Answer 28

a cost to firms which may be passed on to consumers as higher prices

Question 29

What are the 3 disadvantages of government regulation

Answer 29

-unnecessary bureaucracy and ‘red tape’
-compliance costs
-interference in individual economic decision making

Question 30

What does deregulation allow markets to do?

Answer 30

Function more efficiently and incur lower costs (based on assumption individuals known better than gov what is in their self interest)

Question 31

What theory is the justification for the contestable market?

Answer 31

Theory of contestable markets

Question 32

What does the contestable market theory argue?

Answer 32

The most effective way to promote competitive behaviour within markets is not to impose ever-more regulations on firms and markets but to carry out deregulation

Question 33

According to the contestable market view what is the main function of deregulation?

Answer 33

To remove barriers to entry (creating new incentives for firms to enter and contest the market

Question 34

What is regulatory capture?

Answer 34

Occurs when regulatory agencies act in the interests of the regulated firms rather on behalf on the consumers they are supposed to protect

Question 35

What is a second theory that has influence upon the trend towards deregulation?

Answer 35

Regulatory capture theory

Question 36

Can regulatory capture occur without the regulator behaving inappropriately and how?

Answer 36

Yes,

Inevitable close contacts between the regulator and the regulated means the regulator becomes likely to accept the views of the organisation being regulated instead of the consumer

Question 37

What do many people believe happens when regulation is established?

Answer 37

Regulators have an incentive to extend their role by introducing more rules and regulations to justify their pay (restricting competition)

Question 38

Why does the government argue there is no need for a conflict between regulation and deregulation?

Answer 38

Because the regulatory bodies are actively involved in deregulating the industries they oversee

Question 39

Why do free-market economists criticise economic regulation ?

Answer 39

They say it is another example of growing bureaucracy