Unit 6

Question 1

Privatisation

Answer 1

The transfer of assets from government to privately owned businesses.
Became increasingly popular since the 1970s.

Question 2

Example of privatisation

Answer 2

The royal mail, energy, water

Question 3

Benefits of privatisation

Answer 3

• Raising revenue for government
• Reduces public spending and government borrowing
• Promotes competition
• Promotes efficiency
• Popular capitalism

Question 4

Drawbacks of privatisation

Answer 4

• Monopoly abuse
• Short-termism wins
• Ignoring externalities

Question 5

Regulation

Answer 5

The creation of rules within an industry

Question 6

Benefits of regulation

Answer 6

• Encourages firms to strive for productive efficiency through reduced costs
• Protects from monopoly abuse
• Ensures quality and choice are maintained in monopolistic markets

Question 7

Benefits of Derregulation

Answer 7

• Competitive markets will lead to economic efficiency
• Productive efficiency & allocatively efficiency is created
• Less government intervention allows firms to produce to the needs of the market

Question 8

Uk competition policy

Answer 8

Involved measures to enhance competition between firms in order to improve economic outcomes.
Currently overseen by the competition and markets authority (CMA)

Question 9

How does Uk competition policy improve economic outcomes?

Answer 9

Through:

• Legislation
• Privatisation
• Deregulation
• Prevention of mergers
• Actions to prevent restrictive trade practices and abuse of monopoly power.

Question 10

Main theoretical principles underpinning UK competition policy

Answer 10

• Ignoring economies of scale, perfect competition is more likely to be productively and allocatively efficient than a monopoly.
• Monopolists restrict output to raise prices and gain supernormal profits. This results in a net loss of welfare as consumer surplus is reduced and producer surplus is increased.

Question 11

??

Answer 11

• If economies of scale is present, monopolies may produce output at a lower ATC than firms in perfect competition.
• Monopolies making abnormal profits can be more innovative and dynamically efficient than in perfect competition
  (Generally each case is judged on its own merit)

Question 12

What theory should be used to illustrate competition policy?

Answer 12

Contestable market theory

Question 13

How can UK & EU competition policy be achieved?

Answer 13

• Cutting monopoly power
• Restricting mergers & protecting competitive markets
• Creating fairness in markets so that firms don’t abuse dominant positions
• Increase in productive, dynamic, static and allocative efficiency.

Question 14

Costs leading to unsuccessful UK & EU competition policy

Answer 14

• Reduced creativity
• Stops some firms, particularly natural monopolies, from benefiting from huge EoS.
• Lead to gov failures as authorities created distortions in the market that caused inefficiencies.

Question 15

Benefits to successful UK & EU competition policy

Answer 15

• Lower prices following outward shift in supply
• Improved quality
• Increased choices
• Innovation
• Possibly technological change
• Competitive advantage. This will help EU firms compete in a global market. Eg. against Chinese and Indian markets.

Question 16

Public ownership

Answer 16

Provision of goods and services by the government

Question 17

UK examples of public ownership

Answer 17

Education, health services, policing and the services, eg. the army

Question 18

Nationalism

Answer 18

Occurs when the government take a privately owned business into public ownership
The UK saw mass nationalism, by the post second world war Government, from 1945 onwards

Question 19

Reasons for public ownership/ nationalism

Answer 19

• Potential for huge EoS (lower prices and productive efficiency)
• More focus on service provision (Allocative efficiency, gov aim to maximise social welfare)
• Less likely to be market failures from positive and negative externalities.
• Public sector can be a vehicle for macroeconomic control. (gov could influence wages to control inflation for example)

Question 20

Reasons against public ownership/ nationalism

Answer 20

• DEoS- control/ coordination etc.
• Lack of incentives to minimise costs. Complacent and wasteful production.
• Lack of supernormal profit. Less productive efficiency
• Expensive burden on the taxpayer- opportunity cost of using tax revenue in other ways.
• Higher prices due to low competition- allocative inefficiency.
• Greater risk of moral hazard- individuals taking risks don’t take on costs.
• Political priorities override commercial issues

Question 21

Evaluations of public ownership

Answer 21

• Funding vs Delivery- Nationalism has huge costs, but if the end results in consumers getting increased public services is it worth while?
• Competition in the private sector may solve the problem.
• Role of regulation in the private industry
• Size of sector firms- if private sector firms are large and benefiting from EoS, might outweigh potential for DEoS when nationalising.
• Objectives of firms- not all private firms want to profit maximise, they could have an allocatively efficient or socially responsible objective.