Microeconomics Key Points

Question 1

Nationalisation Price Chain

Answer 1

Greater EoS (monopoly power)
Greater ability to invest in productive capital
Results in lower AC, movement towards MES
Lower P passed onto C
Greater consumer welfare, movement to allocative efficiency
L shaped because EoS offsets DEoS

Question 2

Nationalisation and Free State/Direct Provision Assumptions

Answer 2

Government has perfect information regarding the costs and benefits of the proposed policy

Question 3

Nationalisation Price Con

Answer 3

Lack of competition:
Low incentive to innovate
Further exacerbated by lack of SN profits
Hard to be dynamically efficient
Allows scope for cronyism/nepotism, this can lead to diseconomies as stakeholders have differing objectives and therefore communication issues
could be seen as a form of X-inefficiency
The amalgamation of these disadvantages leads to higher prices relayed onto the C

Question 4

Nationalisation Opportunity Cost Con

Answer 4

Puts a burden on the tax payer and the budgetary position
High cost means that gov failure likelihood increases (due to imperfect info)
Funding could go towards a subsidy which would eradicate inevitability but targeted towards lower income households

Question 5

privatisation

Answer 5

Firms compete on price (innovation)
Lower X PE
Profits that are present go towards better quality products may benefit society
Welfare gain
P=MC AE

Question 5

State provision chain

Answer 5

P=0
equitable and more allo
sole provider inelastic supply
assumed to have perfect info sb sc
excess demand

Question 5

state provision evaluation

Answer 5

price mechanism unable to ration off
diminish quality of good
could create function for private sector
imperfect info
gov failure
subsidy may be better
lower cost, targeted at lower income households