Natural monopolies (Privatisation/Nationalisation) (T.O.T.F)

Question 1

What is a natural monopoly

Answer 1

Where the most efficient number of firms in a market is one

Question 2

Give 4 examples of natural monopolies

Answer 2

Water
Gas
Electric (national grid)
Railways

Question 3

What is on the x and y axis of the natural monopoly diagram

Answer 3

x - Average costs
y - Output

Question 4

What does the natural monopoly diagram look like

Answer 4

The left side of an economy of scale diagram

Question 5

Draw the natural monopoly diagram

Answer 5

In notes

Question 6

Why was a regulatory structure put in place when natural monopolies were privatised

Answer 6

To prevent firms from using their power to exploit customers and benefit shareholders

Question 7

Give 2 examples of regulatory (watchdog) bodies

Answer 7

OFWAT
OFCOM

Question 8

What is the purpose of watchdog bodies

Answer 8

It is their job to impose conditions for pricing and standards of service which need to be maintained through investment

Question 9

Give an example of how regulators do not use the full extent of their powers

Answer 9

They have the power to fine up to 10% of global turnover, however this is rarely used (this is a form of gov failure)

Question 10

Why are regulators often criticised by consumer groups

Answer 10

For failing to protect consumers fully and not using the full extent of their powers

Question 11

What is regulatory capture

Answer 11

The situation where regulators of previously privatised firms form a close working relationship with the company they are supposed to be holding to account, resulting in less severe sanctions

Question 12

What is nationalisation

Answer 12

A nationalised industry is owned and operated by the government

Question 13

Why are nationalised industries often established

Answer 13

To provide goods and services that are of strategic importance or are in the public or social interest

Question 14

What are 4 arguments in favour of nationalisation

Answer 14

Public interest
Social equality
Service quality
Job securityE

Question 15

Explain how nationalisation may be in the public interest

Answer 15

It is seen to ensure services are operated for the public rather than for profit

Question 16

Explain how nationalisation may enhance social equality

Answer 16

Benefits generated by the industry can be more evenly distributed among the population

Question 17

Explain how nationalisation can enhance job security

Answer 17

Private companies are likely to prioritise profit over job security, leading to redundancies and wage costs

Question 18

What is privatisation

Answer 18

The transfer of ownership of a state owned enterprise to the private sector, which involves stock market floatation

Question 19

What is stock market floatation

Answer 19

The creation and distribution of stocks on the stock exchange

Question 20

What are 4 arguments in favour of privatisation

Answer 20

Efficiency
Access to capital
Raising revenue
Reduction of government subsidies

Question 21

Explain how privatisation may lead to more efficiency

Answer 21

Private companies have the incentive to innovate, reduce waste and improve service quality to remain competitive

Question 22

What does access to capital mean

Answer 22

Ability to borrow money from banks for investment

Question 23

How does privatisation lead to revenue for the government

Answer 23

The government sells the company, and so it receives a one off payment

Question 24

How does a privatisation lead to a reduction of government subsidies for a loss making industry

Answer 24

It can reduce financial burden on taxpayers by shifting some costs to the private sector

Question 25

Draw the diagram showing how monopolies aren’t allocatively efficient, but a nationalised firm is

Answer 25

(Normal MC MR AR diagram for private firms, showing a welfare loss point to the demand curve)
(Same for nationalised but the new allocatively efficient point is MC=MR, generating no welfare loss)

Question 26

What is a welfare loss

Answer 26

A type of market failure where there is a cost to society/consumer

Question 27

Why do nationalised industries not generate a welfare loss

Answer 27

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)

Question 28

Why do privatised firms generate a welfare loss

Answer 28

As they charge the profit maximising point MC=MR

Question 29

What is the Schumpeterian argument for monopolies

Answer 29

‘Supernormal profit allows for re investment into R&D’ (Creative destruction)

Question 30

Draw a diagram showing dynamic efficiency

Answer 30

LRAC curve shifting down (with x axis output, y axis AC)

Question 31

Why does imperical evidence suggest the UK has a poor R&D record

Answer 31

The UK has a shareholder culture

Question 32

What is x inefficiency

Answer 32

The distance between LRAC and LRAC1 on a dynamic efficiency diagram

Question 33

What is the argument for monopolies even when considering they may under invest

Answer 33

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