LS17 - Competition, Protecting Suppliers And Workers Flashcards
SME
Small and medium enterprise - new entrants in a market
Start up
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
Why should governments support SMEs and start ups
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
Problems start ups and SMEs face
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
What can the government do to support start ups and SMEs
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
Competitive tendering
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
Benefits and drawbacks of competitive tendering
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
Privatisation
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
Private finance initiative
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
Benefits of PFI
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
Drawbacks of PFI
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
Deregulation
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
Benefits of deregulation
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
Disadvantages of deregulation
Deregulation may not promote competitive outcomes if new firms do not actually enter the industry perhaps due to other barriers to entry in the industry remaining high- Monopoly or oligopoly may form, where incumbent firms use their market power to predatory price, advertise heavily or flood the market with goods or services to establish their dominant position frightening off potential competition. Allocative and productive inefficiency will result with consumers losing out significantly from higher prices and thus lower consumer surplus but also lower quantities, reducing choice.
If the market is a natural monopoly is makes sense for one firm to supply the entire industry, where competition would promote a wasteful duplication of resources- allocative inefficiency and lack of the huge E.O.S that a single natural monopoly would be able to exploit; productive. inefficiency. This is true as long as the natural
monopoly is regulated to produce at allocatively efficient outcomes. Deregulation- promotes competition in natural monopoly market, not in best interests of society, increased prices, decreasing output thus reducing welfare/
Loss making goods and services will not be produced- ed. This is because profit motivated firms will cease production
where losses are made. These goods and services may have generated significant social benefit thus harming social welfare if they are no longer produced. However, if firms in a deregulated industry make enough supernormal profit, they can cross subsidise loss making goods or services that consumers desire allowing production to still take place.
The drive to reduce cots may lead to shortcuts being taken in the production process where the actual quality of output may not be as good and product safety a concern- This is because cost savings might imply poorer customer service and less focus on quality perks which raise the cost of production but also greater risks in
consumption if safety standards are not as tight. This could have a detrimental Impact on consumers but this is unlikely to be the case if competition is strong in a deregulated market. Firms will know that taking shortcuts and excessive risk will only harm their long term market share and so will not do it.
Firms in a deregulated market may not be dynamically efficient- This is because intense competition post deregulation can reduce a firm’s ability to make large supernormal profits thus restricting re investment back into the business. Over time consumers lose out with limited technology advances
Nationalisation - protecting suppliers and employees
DEF- Process of taking an industry into public ownership
PROS:
Public sector firms may benefit from larger economies of scale. public sector firms are often natural monopoly providers with extremely high fixed costs. These firms will benefit from lower average costs compared to smaller private firms hence are likely to be more productively efficiently. Furthermore, allowing many private firms to provide such services will lead to a wasteful duplication resources and thus allocative inefficiency.
Public sector firms are more concerned with service provision. public sector firms work for the benefit of society = more likely to meet needs and wants of the public to max social welfare. Consequently more likely to be allocative efficient with resources following consumer demand where prices are low and quantity of provision is high- gov consider externalities
Market failures arising from negative externalities/positive externalities are less likely with public sector
the role of the public sector is to allocate resources where society desires, hence these firms will be more likely to take externalities into account in planning and construction= allocative efficiency, with no over/under production as resources will be allocated at the socially optimum level of output - any misallocation of resources will be avoided
The public sector can be a vehicle for macro-economic control. the greater the role of the public sector in the economy, the greater the number of public sector workers. Consequently when inflation is running high, gov can counter this by restraining public sector pay increases. Also governments can alter the level of employment to correspond with different stages of the economic cycle.
CONS:
Public sector firms lack the incentive to minimise costs.- lack of competitive pressure and lack of profit motive. Therefore firms unlikely to operate at minimum point of their AC curve (unlikely to reach their MES) thus they voluntarily forgo E.O.S and are not productively efficient leading to higher prices and lower CS for consumers.
§ Public sector firms may suffer from diseconomies of scale. Sole provider in the market, public sector firms may become too large allowing for inefficiencies in the production process to creep in. The firm will suffer from higher average costs as it expands thus will be productively inefficient leading to higher prices and lower CS
§ Public sector firms may be complacent and wasteful in production. a lack of competitive pressure and lack of a profit motive. Consequently, production may take place above the AC curve resulting in X-inefficiency and firms having to rely on subsidies= costly, and wasteful use of taxpayer’s money.
§ Prices may be lower and CS greater with private sector involvement- competitive pressure and a significant profit motive hence firms will strive to be as efficient as possible, lowers costs to remain competitive. Allocative efficiency may be achieved with resources following consumer demand and productive efficiency achieved too with full E.O.S exploitation.
§ There is a lack of supernormal profit made in the public sector. This is because the objective of public sector firms is to satisfy the public with low prices and high output. Dynamic efficiency is unlikely to occur implying less innovation and improvements in technology keeping costs and prices higher in the L/R
§ Public sector provision is extremely expensive and funded through the taxpayer. There is a large OC - money could have been best used elsewhere where more benefit could have been derived e.g. in promoting education to reduce structural u/e or to help a manufacturing base to re-balance and diversify the economy.
§ There is a greater risk of moral hazard with public sector involvement. Politics or gov employed managers aren’t directly accountable for action- take sig risk- inc change of faiure- burden on taxpayer . Nationalised industries suffer from the principal-agent problem and moral hazard, as managers know that any loss they make will be covered by the government.
§ Political priorities can override commercial issues on capital projects- politicians as elected rep have vote max as main obj- the construction of key capital proh don’t go ahead to protect politicians from losing popularity- if they fail even if such projects are in L/T interest. Key investments may not take place – quality and quantity of infrastructure poor in economy and competitiveness lower.
EVAL:
Despite nationalisation being very expensive, it can be argued that the delivery of key public senices provides more benefit than costs especially if the service would be under produced in the private sector as it is a merit good or not supplied at all due to it being a public good or it generating a loss for profit motivated private firms. Once more, the delivery of such services can create economic growth and generate a return to the gov via higher tax revenues over time
The size of nationalised vs privatised firms is important to evaluate whether nationalisation will result in. With one large state company supplying the entire market, E.O.S exploitation = significant. If private firms - smaller and unable to exploit the same E.O.S - argument for
nationalisation is strong. However if nationalised firm becomes too big and suffers from D.E.O.S it could be argued that smaller, productively efficient private firms would promote better outcomes for society.
If regulation of private firms is strict or the level of competition in the private sector is strong, nationalisation my promote greater inefficiency- y and costs to society than benefits. Given that nationalisation is highly expensive too, allowing the private sector to supply the industry at socially desirable levels either due to
regulation or natural competition would be in the public interest. This argument breaks down only if there is
significant market failure in the private sector.
Public private partnerships might be a better long term solution to maximise social welfare where resources are allocated at socially optimum levels with low prices due to government monitoring and control. Dynamic efficiency benefits will occur too due to the efficiency and profit motivated drive of private businesses
