Natural monopolies (Privatisation/Nationalisation) (T.O.T.F) Flashcards
What is a natural monopoly
Where the most efficient number of firms in a market is one
Give 4 examples of natural monopolies
Water
Gas
Electric (national grid)
Railways
What is on the x and y axis of the natural monopoly diagram
x -Output
y - Average costs
What does the natural monopoly diagram look like
The left side of an economy of scale diagram
Draw the natural monopoly diagram
Why was a regulatory structure put in place when natural monopolies were privatised
To prevent firms from using their power to exploit customers and benefit shareholders
Give 2 examples of regulatory (watchdog) bodies
OFWAT
OFCOM
What is the purpose of watchdog bodies
It is their job to impose conditions for pricing and standards of service which need to be maintained through investment
Give an example of how regulators do not use the full extent of their powers
They have the power to fine up to 10% of global turnover, however this is rarely used (this is a form of gov failure)
Why are regulators often criticised by consumer groups
For failing to protect consumers fully and not using the full extent of their powers
What is regulatory capture
The situation where regulators form a close working relationship with the company they are supposed to be holding to account, resulting in less severe sanctions
What is nationalisation
A nationalised industry is owned and operated by the government
Why are nationalised industries often established
To provide goods and services that are of strategic importance or are in the public or social interest
What are 4 arguments in favour of nationalisation
Public interest
Social equality
Service quality
Job security
Explain how nationalisation may be in the public interest
It is seen to ensure services are operated for the public rather than for profit
Explain how nationalisation may enhance social equality
Benefits generated by the industry can be more evenly distributed among the population
Explain how nationalisation can enhance job security
Private companies are likely to prioritise profit over job security, leading to redundancies to lower wage costs
What is privatisation
The transfer of ownership of a state owned enterprise to the private sector, which involves stock market floatation
What is stock market floatation
The creation and distribution of stocks on the stock exchange
What are 4 arguments in favour of privatisation
Efficiency
Access to capital
Raising revenue
Reduction of government subsidies
Explain how privatisation may lead to more efficiency
Private companies have the incentive to innovate, reduce waste and improve service quality to remain competitive
What does access to capital mean
Ability to borrow money from banks for investment
How does privatisation lead to revenue for the government
The government sells the company, and so it receives a one off payment as well as future corporation tax
How does a privatisation lead to a reduction of government subsidies for a loss making industry
It can reduce financial burden on taxpayers by shifting some costs to the private sector
Draw the diagram showing how monopolies aren’t allocatively efficient, but a nationalised firm is
What is a welfare loss
A type of market failure where there is a cost to society/consumer
Why do nationalised industries not generate a welfare loss
The priority of the firm may change to be in the consumer interest leading to elimination of welfare loss as they now charge the allocatively efficient price (MC=AR)
Why do privatised firms generate a welfare loss
As they charge the profit maximising point MC=MR
What is the Schumpeterian argument for monopolies
‘Supernormal profit allows for re investment into R&D’ (Creative destruction)
Draw a diagram showing dynamic efficiency
Why does imperical evidence suggest the UK has a poor R&D record
The UK has a shareholder culture
What is x inefficiency
The distance between LRAC and LRAC1 on a dynamic efficiency diagram
What is the argument for monopolies even when considering they may under invest
Even under investment, is still investment. Monopolies are the only source of R&D as firms in perfect competition do not invest on R&D as they do not make supernormal profit
Give an example of a failure of a natural monopoly
Thames water
Lack of timely investment in renewing their pipelines leading to waste being released into the ocean causing environmental concerns
in August 2024, Ofwat imposed a £168 million penalty on Thames Water, Yorkshire Water, and Northumbrian Water for routinely releasing sewage into rivers and seas
