Micro 15 - Regulation and Direct Provision

Question 1

Regulation - definition

Answer 1

> Legislation and rules set by the government that influences behaviour in markets.
This is usually by either prohibiting certain behaviours or making behaviours mandatory.

Question 2

What do regulations do?

Answer 2

> Regulations will shift different curves in different directions depending on what it is.
When the gov. impose a regulation, there are a number of impacts this could have. Most commonly, the regulation will have one or more of the following effects:
1. increase costs of production, reducing supply.
2. Restricting access to a market, reducing supply.
3. Reducing or prohibiting producers’ activities or use of materials that cause externalities, so reducing MSC relative to MPC.
4. Prohibiting or reducing behaviours by consumers that cause negative externalities, so reducing the difference between MSB and MPB.
5. Making consumption of a good/service compulsory, so increasing demand.
6. Making consumption of a good/service more costly or difficult so reducing demand.
7. Making the provision of information compulsory, thus reducing information failure.
8. Banning the production or consumption of a demerit good entirelu.

Question 3

Why may regulations not be very successful or make market failure worse? - LIST

Answer 3

1. Enforcement costs.
2. Right level of regulations.
3. Supply side.
4. Who is affected?
5. Regulatory capture.
6. Unintended consequences.
7. Macroeconomic implications.
8. Government information failure.

Question 4

Why may regulations not be very successful or make market failure worse? - enforcement costs

Answer 4

> There are enforcement costs of regulations for the government so it’s important they weigh up the cost of the negative externalities against the benefits that the regulation will bring first.

Question 5

Why may regulations not be very successful or make market failure worse? - setting the right level

Answer 5

> It’s difficult to know how regulation is required to reach the optimal level.
Over-regulation can cause black markets to appear and firms move out that economy.
Whilst under-regulation can mean that the enforcement costs aren’t worth it - ‘i.e. a waste of money and time.’

Question 6

Why may regulations not be very successful or make market failure worse? - supply side

Answer 6

> Can make it more expensive for firms to operate and so they may be less inclined to employ as many people.
Especially regarding issues such as, maternity/paternity pay, statutory sick pay, holiday leave, sick pay.

Question 7

Why may regulations not be very successful or make market failure worse? - who is affected?

Answer 7

> Smaller firms will be more affected than larger ones.

Question 8

Why may regulations not be very successful or make market failure worse? - regulatory capture

Answer 8

> Firms covered by regulatory bodies can sometimes influence the decisions of the regulator to ensure that the outcomes favor the companies and not the consumer.

Question 9

Why may regulations not be very successful or make market failure worse? - government information failure

Answer 9

> Where the government fails to accurately predict the necessary level or regulation required to get their desired outcome.

Question 10

Why may regulations not be very successful or make market failure worse? - unintended consequences

Answer 10

> Decreases the amount of jobs available in the economy.
Black markets form.
Firms move out the economy.

Question 11

Why may regulations not be very successful or make market failure worse? - macroeconomic implications

Answer 11

> The opportunity cost of firms employing people is higher so there may be more unemployment.
Cost of capital increases with the scarcity of raw materials increasing so less production and supply.
Harms trade, increased costs.

Question 12

Government Failure - definition

Answer 12

> When government intervention in a market to correct market failure leads to a worsening misallocation of resources.

Question 13

Direct government provision - definition

Answer 13

> When the government provides a good or service rather than leaving it open to the private sector.

Question 14

Nationalisation - definition

Answer 14

> When the government takes over and buys out a firm or industry previously privately owned.

Question 15

Privatisation - definition

Answer 15

> Handing ownership and control of a previously publicly run industry to the private sector.

Question 16

Why use direct provisioin and nationalisation?

Answer 16

1. Natural monopolies. Improve AE.
2. Public goods.
3. Merit goods.
4. Failing firms.

Question 17

Failing firms,

Answer 17

> 2008, gov. took ownership of Bradford and Bingley’s mortgages and loans as well as The Royal Bank of Scotland.
2018, gov. bought East Coast Mainline from Virgin Trains.
The gov. also own/partly own:
1. British Nuclear Fuels plc (who oversee production of nuclear energy).
2. Network Rail.
3. Urenco.
4. Nuclear Decommissioning Authority.
5. National Air Traffic Services.

Question 18

Pros and Cons of the government owning other firms

Answer 18

>Con = gov acquires company's debt.
>Pros = can follow strict safety regulation, health and safety issues concerned with these, ensure provision meets country's needs.

Question 19

Advantages of nationalisation

Answer 19

1. Greater potential for economies of scale. Lower AC = lower price.
2. More focus on service provision. Maximise consumer welfare. Allocative efficiency benefits especially as prices are likely to be lower from above point.
3. Less likely to be market failures arising from externalities.
4. Public sector can be a vehicle for macro-economic control: more public sector companies - gov. can manipulate wages to control employment levels.

Question 20

Disadvantages of nationalisation

Answer 20

1. Diseconomies of scale.
2. Lack of incentive to minimise costs (complacency and wasteful production creeping in).
3. Complacent and wasteful production due to lack of profit motive.
4. Lack of supernormal profit so dynamic inefficiency is more likely.
5. Highly expensive and a burden on the taxpayer. (Bring in OC argument, could have used taxpayer money in a better way?).
6. Higher prices due to low competition. Monopoly outcomes that you’re trying to prevent taking place.
7. Greater risk of Moral Hazard (individuals who take the risk don’t bear the costs of the risk).
8. Political priorities override commercial issues.

Question 21

Moral Hazard - definition

Answer 21

> Lack of incentive to guard against risk where one is protected from its consequences.

Question 22

EEvaluation - nationalisation

Answer 22

1. Funding vs delivery of key public services? Yes nationalisation has a huge cost but if they get better delivery of service than in private sector then you could argue it’s worth it. Vice versa.
2. Public Private Sector Partnerships better?
3. Role of regulation? You don’t need to completely nationalise if you can regulate instead.
4. Competition in the private sector: end results will be better, just to ensure good regulation.
5. Size and objective of private sector firms: if private sector firms are large and benefiting from huge economies of scale then that might be a benefit worth keeping. Not all private sector firms want to maximise profit.