Micro other stuff Flashcards
Privatisation pros
1) Privatisation can promote outcomes like those attained in competitive market structures. Allocative efficiency can be achieved with prices close to or equal to marginal cost. Resources are allocated according to consumer demand with consumers getting what they demand at the quantity they desire. Given that privatised firms can compete significantly on both price and non-price factors, consumer choice is high and prices are low increasing consumer surplus in the market. The quality of the product being sold is excellent too given the drive to meet the needs and wants of the consumer.
2) Privatisation can lead to productive efficiency where production takes place at the lowest
point of
the average cost curve. This means all possible economies of scale are being exploited as firms cannot increase output and lower their average costs any further. These lower average costs can translate into lower prices for the consumer increasing their consumer surplus. Privatised firms do this to benefit from
lower average costs, which can lead to higher levels of supernormal profit
over time, and increases in market share if economies of scale benefits translate to lower prices than rivals.
Privatisation evaluation
1) The impact of privatisation depends on how many firms actually enter the industry. fI barriers to
entry are high such as legal barriers or new firms creating their own barriers, entry into the market will
be restricted with a greater chance of monopoly or oligopoly. Governments therefore must strongly deregulate to keep entry barriers low to promote the competition necessary for privatisation to work.
2) The form of privatisation used will determine whether privatisation generates revenue or cost to the government. fI a PFI or contracting out of services approach is used, the cost to the government may be
higher than if left to the state sector, burdening future tax payers. However fi selling state assets to the private sector, this could generate substantial income as long as the government has priced the sale correctly. fI not, revenues will be lower than they should be creating asignificant opportunity cost
where certain public services will not receive the full funding they could have benefitted from.
Privatisation cons
1) Privatisation may not promote competitive outcomes fi many firms do not actually enter the industry. Monopoly or oligopoly may form with
allocative and productive inefficiency the end result. Consumers would lose out significantly from
higher prices and thus lower consumer surplus but also lower quantities, reducing choice.
2) fI the market si a natural monopoly it 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 economies of scale
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. Privatisation, which promotes competition in a natural monopoly market, is not in the best interests of society increasing prices, decreasing output and thus reducing welfare.
Nationalisation pros
10.3 Nationalisation
Nationalisation- Theprocessoftakinga nindustry into public ownership Nationalisation Pros
1) Public sector firms may benefit from larger economies of scale. This is because 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 efficient.
Furthermore, allowing many private firms to provide such services will lead to a wasteful duplication of resources and thus allocative inefficiency.
2) Public sector firms are more concerned with service provision. This is because they public sector firms work for the benefit of society and so are more likely to meet the needs and wants of the public to maximise social welfare. Consequently, there is more likely to be allocative efficiency with resources following consumer demand, where prices are low and quantity of provision is high.
) Market failures arising from negative externalities/positive externalities are less likely with public sector involvement. This is because the role of the public
sector is to allocate resources where society desires, hence these firms wil be more likely to take externalities into account in planning and construction. There is more likely to be 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.
Nationalisation cons
1) Public sector firms lack the incentive to minimise costs. This is because there is a lack of competitive pressure and a lack of a profit motive. Therefore these firms are unlikely to operate at the minimum point of their AC curve (unlikely to reach their MES) thus they voluntarily forgo economies of scale and are not productively efficient leading to higher prices and lower consumer surplus for consumers.
2) Public sector firms may suffer from diseconomies of scale. This is because as the 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 consumer surplus.
Nationalisation evaluation
1) Despite nationalisation being very expensive, it can be argued that the delivery of key public services provides more benefit than costs especially fi 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 government via higher tax revenues over time.
2) The size of nationalised vs privatised firms is important to evaluate whether nationalisation will
result in greater economies of scale benefits or loses. With one large state company supplying the entire
market, economies of scale exploitation would be significant. fI private firms are smaller and unable to
exploit the same economies of scale, the argument for nationalisation is strong. However fi a nationalised firm becomes too big and suffers from diseconomies of scale it could be argued that
smaller, productively efficient private firms would promote better outcomes for society.
Price Discrimination Pros
1) Price discrimination can promote dynamic efficiency as the monopolist is making more supernormal profit. Such profit can then be reinvested back into the company in the form of technology advances
and R&D. This is hugely beneficial for consumers who will receive brand new, better quality products over time - perhaps able to purchase products that do not yet exist. Prices could be lower over time fi
technology advances reduce costs for businesses, which are then passed on to consumers. The choice available to consumers would increase too.
4) Price discrimination can increase the total output being produced by the firm thus allowing them to exploit greater economies of scale. These lower average costs may translate into lower prices for the consumer increasing their consumer surplus. Once more, with more output being made consumers benefit from greater choice.
Price Discrimination Cons
1) Price discrimination produces outcomes that are allocatively inefficient. This is because consumers are exploited by prices being charged greater than marginal cost. Resources are therefore not allocated according to consumer demand with consumers getting a lower quantity than they desire. Consumer
choice is restricted and prices are high reducing consumer surplus in the market. Al three forms of price
discrimination are dangerous in
this regard but first degree and the price inelastic demand segment in third degree price discrimination is where the greatest exploitation takes place.
2) Firms who use third degree price discrimination may use the excessive profits being made from the inelastic demand market segment to price below costs in the elastic demand market segment in order
to drive out competition. This would be against the long term interest of consumers in the off peak market who lose out with higher prices charged over time fi competition is lacking.
3) Third degree price discrimination could significantly worsen income inequality. This is because the
consumers who are in the price inelastic demand market segment must pay much higher prices, taking a large proportion of their disposable income just in travelling to and from work. fI these individuals are
the poorest in society, income disparities will increase especially fi the wealthier older generation feature more in the off peak market.
Behavioural economics
Behavioural economics disputes the basic premise of rational economic thought arguing against the notion that consumers are always rational and utility maximising. They argue that:
1) There is bounded rationality. Consumer rationality is bounded by
.i
i.
Time. Consumers do not have the time necessary to make perfectly rational, utility maximising
decisions all the time.
Choice. At times, consumers are flooded with too much choice to comprehend, evaluate and
then make a perfectly rational decision.
Information. Imperfect information will hinder the process of making a utility maximising
decision. Information may be unclear, missing, not equally shared between two parties or too complex leading to an irrational decision being made where utility is not maximised.
2) There is bounded self-control. Even fi consumers have all the information available, have weighed it up and know what a rational decision is, they may not actually make ti fi their self-control is bounded. Perhaps they are addicted to a good like cigarettes that they know only does harm but they cannot stop
themselves consuming it. In the case of exercise and going to the gym, poor self control may prevent an individual starting or maintaining such activity despite knowing it increases their utility.
Behavioural economics 2
Behavioural economists, further to the above, will argue that emotional, psychological and social factors can influence decision making instead of consumers always following the traditional neo-classical idea of rational, utility maximising decisions. These factors are known as cognitive biases:
1) Anchoring. Price anchoring occurs when a value is imprinted in the minds of consumers as a reference point to judge the value of the good or service. For example when shops display the recommended retail price (RRP) on price labels whilst also showing the
real discounted price. Consumers have been anchored by the RRP price and by looking at the real price, they feel as though they are getting an excellent deal even though this price may not be good value.
2) Social Norms. This is where consumers make decisions based on society etiquette and expectations
of how to behave given how other people in society act. Agood example of this is the practice of tipping
in restaurants, which has become a social norm in many countries, whereas the same practice does not extend when visiting someone’s house for dinner despite enjoying a similar fi not better experience.
3) Availability Bias. This occurs when consumers make decisions based on the ease at which information
is available to them. Agood example of this is when consumers ignore the multitude of information to suggest that smoking is purely harmful and will lead to premature death because that
individual may have a grandmother who has smoked her whole life and continues to live into her eighties. This situation is an anomaly and contrary to the evidence but is weighted too heavily because of how easily that example enters an individual’s mind. Such a bias might lead to that person starting to smoke, making an irrational decision.
