LS17- Competition, Protecting Suppliers and Workers Flashcards
What is an SME?
- small and medium enterprise e.g. a local, independent pizza takeaway business
- SMEs outnumber large companies by a wide margin and employ many more people
What is a start-up? + e.g.
- a company initiated by an entrepreneur to develop a scalable business model
- refers to new businesses that intend to grow large beyond the solo founder
- e.g. Uber, AirBnB
Benefits of small-businesses and start-ups
- increased competition
- jobs are created
- choice is increased for consumers
- source of export revenue
- seed-bed for innovation
- may be more innovative, flexible and quick to changes in market conditions and reacting well to different needs and wants of customers
What problems do SMEs face?
- credit (riskier for banks to give them loans)
- business skills
- recruitment
How can government support start-ups and SMEs?
- provide information on how to set up businesses
- deregulate to reduce barriers to entry
- provide training and education reforms
Competitive tendering
- when private-sector firms compete to win contracts to perform tasks on behalf of the government - government chooses who they believe provides best quality and cost
- introducing the profit motive to economic activity previously performed by the state should lead to an increase in efficiency and quality
- the taxpayer should benefit from improved and/or cheaper public services
Downsides of competitive tendering
- if gov focuses too heavily on price, quality of key public services may decline
- the contracts often only have a few bidders therefore competition is limited
What loss do the government face when they support start-ups?
opportunity cost
Privatisation
when a firm or whole industry changes from being run by the public sector to the private sector - governments enact this change e.g. thatcher’s conservative governments
Why do supporters of privatisation argue that it increases efficiency?
- introduces the profit motive and competition
- therefore firms will, in theory, seek to reduce costs and improve quality to maximise profits
- gov gains rev from sale of assets e.g. royal mail - however, often sold too cheaply
Which industries have been privatised in the UK?
e.g. rail, energy, water
Disadvantages of privatisation
- despite profit motive, poor regulation and/or natural monopoly conditions worsen outcomes for consumers - above inflation price rises in rail and energy markets are evident of this
- social costs ignored e.g. rural public transport networks closing or being heavily reduced
- gov loses source of revenue
Private Finance Initiative (PFI)
- government takes competitive bids and then buys a whole investment package e.g. construction of a hospital
- gov pays back cost over a set period of time
PFI advantages
- private sector believed to be more efficient
- extra funding can kick-start more projects e.g. 22 NHS trusts use PFI -> econ growth, increased productive capacity
- private sector not paid until asset delivered - PFI firms pay tax making it cheaper for gov in theory
PFI disadvantages
- financing costs of PFI are typically 3-4% over that of gov debt - some estimates found that paying off a £1bn through PFI cost taxpayer equivalent to a direct gov debt of £1.7bn
- poor value for money - some infrastructure not designed to last more than length of contract
- high administration costs on advisors and lawyers - estimate of >£11m for a PFI hospital
Deregulation
- the removal of government regulations
- became a popular policy tool for economic liberals within conservative and labour parties from 1980s onwards
Some sectors most affected by deregulation
financial markets, public transport, postal services
How will deregulation affect the contestability of a market?
It should increase the contestability of a market as it reduces barriers to entry or exit
Advantages of deregulation
- downward pressure on price due to increased competition
- increased quality
- higher levels of innovation
Disadvantages of deregulation
- market stability - can lead firms to take excessive risks and load up on debt
- public safety - may lead to deterioration in public safety e.g. Grenfell Tower
