LS17 - Competition, Protecting Suppliers and Workers

Question 1

SME

Answer 1

Small and medium enterprise - new entrants in a market

Question 2

Start up

Answer 2

Company initiated by an entrepreneur to develop a scalable business model - new business that aims to grow larger beyond the initial founder
Uber, Ocado, AirBnb

Question 3

Why should governments supports SMEs and start ups?

Answer 3

They promote competition - govt supporting SMEs and start ups makes it easier for entrepreneurs to set up businesses, increasing the number of firms that challenge existing firms - consumers can benefit from increase choice and quality
* Create competition
* Create jobs
* Choice is increased
* Source of exports
* Promote innovation - more flexible and quick in responding to changes in market condition, reacting to consumer needs

Question 4

Problems Start ups and SMEs face

Answer 4

• Credit - difficult for smaller companies to get finance as banks see them as large risks
• Business skills - some people feel they lack the skills and experience to succeed in business
• Recruitment - finding competent staff can be difficult

Question 5

How can govts help Start ups and SMEs?

Answer 5

• Provide information on how to set up businesses
• Deregulation - easier to enter markets
• Streamline the process of setting up and running a business
• Provide training to help people gain business skills
• Educational reform to increase the skills of overall workforce
• Provide business mentoring services

Question 6

Competitive tendering

Answer 6

Private sector firms compete to win contracts to perform tasks on behalf of the government - the govt chooses a firm that will be best in terms of quality, cost and duration
Introduces a profit motive to economic activity usually performed by the state - increase in efficiency and quality
Example: providing catering for a school; building a hospital

Question 7

Benefits and Drawbacks of Competitive tendering

Answer 7

Benefits:
* Market forces to improve quality and choice as private sector will be responsible for allocating more resources
* Prices should fall too, taxpayer will benefit
Drawbacks:
* If govt focuses on getting cheapest deal, firms might respond by reducing quality
* Outsourcers (firms involved in competitive tendering) have larger bargaining power due to large size and experience - better negotiation –> taxpayers get poor value of money
* Lack of bidders mean competition is limited

Question 8

Privatisation

Answer 8

Firm or industry shifts from being run by public to private sector
Benefits:
* Introduces profit motive and competition for firm - so firms seek to reduce costs and improve quality in order to boost profit - increase in efficiency
* Govt gains revenue from sale of public assets
* State monopoly replaced by multiple firms –> increase in competition - lowering prices and improving quality
Drawbacks:
* Even with a profit motive, poor regulation and monopoly condition means it is unlikely to result in better conditions for the consumer
* Social costs and benefits likely to be neglected
* Govt loses on source of revenue
* Public sector assets are often sold too cheaply - Royal Mail
* Infrastructure like water and rail better off under state control as they are vital services

Question 9

Private Finance Initiative (PFI)

Answer 9

Govt take competitive bids and then buys a whole investment project such as construction of a new hospital - pays back the costs over a set period of time

Question 10

Benefits of PFI

Answer 10

• Efficiency - private sector better than managing investment projects and more cost efficient than public sector
• Extra Investment - extra funding can kick start more projects, bringing economic and social benefits - projects supporting health or educuation can improve productive capacity and economic growth in the long run
• Delivery - private sector not paid until project is delivered - fixed price contracts for PFI firms and penalties if not delivered within deadline - they also pay taxes, contributing to govt revenue
• Dynamic efficiency - private sector better placed to bring innovation and good design to projects, and higher quality, lowering maintenance costs in the future - bidding process creates competition

Question 11

Drawbacks of PFI

Answer 11

• Debt costs - cost of PFI has increased, resulting in over 3-4% of govt debt, costing more for taxpayers
• Inflexibility and poor value for money - long service contracts may be difficult or costly to change; infrastructure may not be disgned to last more than length of contract - will need replacing or high maintenance costs
• Risk - risk lies with the govt; PFIs are complicated to organise and no guarantee that private sector will be more cost efficient than public
• Admin - large spending on lawyers and costs of bidding process - ex: cost of bidding for PFI hospital was more than $11mn
• Dependence - govts can get addicted to PFI rather than using govt revenue/borrowing for key projects - PFI has added to govt debt, but raised large revenue for PFI firms

Question 12

Deregulation

Answer 12

Removal of govt regulations - making entry and exit to market easier, raising contestability, increasing num of firms in market - greater competition, efficiency and consumer satisfaction

Question 13

Benefits of Deregulation

Answer 13

• Price - deregulation can increase competition, so incumbent firms are less likely to profit max due to threat of new entry, downward pressure on price
• Quality - pressure on firms to raise quality to keep up with competitors
• Innovation - Lower barriers to entry can increase level of innovation as new firms are more likely to be innovative and take more risks