Micro 1

Question 1

context of water privatisation

Answer 1

• since privatisation in 1989, water bills have risen 40%
• thames water has pumped at least 7bn litres of sewage into thames since 2020, no compensation after storm ciaran where was no water
• despite problems in indsutry companies pay themselves £72bn in dividends since privatisation.
• privatisation raised £7.5bn

Question 2

evaluate the idea that profit motvie leads to increased efficiency in water industry

Answer 2

• a profit motive can increase efficiency, but in a public utility like water the profit motive is more dubious.
• In a public utility like water the easiest path to higher profits is to under-invest, put up bills and discharge sewage into rivers rather than treat
• 2023 was worst year for sewage spills reaching a total of just under half a mill

Question 3

arguments for privatisation

Answer 3

• The private sector would be more efficient and make better use of investment funds. (have invested £123bn but annual investment has fallen by debt increases)
• The private sector would not be held back by government limits on investment levels.(e.g investemnt capped at 2bn a year in 1980s
• The government would raise a one off lump sum for selling the infrastructure. (7.5bn)
• The water regulator, OFWAT would prevent the new private monopolies from abusing their market power.

Question 4

Arguments for wtaer industry nationalisation

Answer 4

• regional water utilities to operate more in the public interest with lower water bills for households which then increases their economic welfare.
• nationalisation involves a transfer of ownership from private to public sector.
• Instead of prof max and returns for shareholders (Extract B says that Thames Water has paid out £2 billion in dividends in ten years) a public sector utility might switch to pricing closer to an allocatively efficient price equal to marginal cost
• lower water bills icnreases CS and reduces real incomes, relevant to LIC consumers where high wtaer bills are regressive and reduce amount to spend on basic necessities like food
• diagram should be monop analysis comparing monop and competitive outcomes

Question 5

Evaluate the idea that nationalisation will result in lower water bills

Answer 5

• state-owned water utilities would be likely to make less profit than if in the private sector.
• prices would probably be lower relative to the average and marginal cost of supply.
• without the discipline of shareholders and stock markets, there is the risk of X-inefficiencies due to to the lack of competition in the industry.
• less profit to reinvest in water supply network to reduce leakage rates e.g Thames water has invested £1bn in expanding and improving treatment works
• no more corporoation tax from wtaer firms as well

Question 6

Second point as to why water idnsutry should be nationalised

Answer 6

• water industry is a natural monopoly, type of market structure in which competition is undesirable as it leads to wasteful duplication of resources and non-full exploitation of EOS
• Natural monopolies in the state sector can achieve economies of scale leading to big gains in productive efficiency and value for money for taxpayers
• total FIXED costs of operating the water supply network (from reservoirs to ”dedicated pipe networks” and treatment of waste water) are huge. This means that the average fixed cost and average total cost of supply will fall as more households and businesses are connected to the network. so LRAC falls due to internal EOS
• so if water is in public sector, average household bills can be kept relatively low and the industry can benefit from higher levels of capital investment funded by government, who can borrow £ billions at lower long term interest rates than the private sector. Investment is important in cutting leakages and preventing wtaer scarcity as pop grows
• SHOW NATURAL MONOPOLY DIAGRAM

Question 7

EVALUATE THE POINT THAT WEATER SHOULD BE NATIONALISED DUE TO NATURAL MONOPOLY STATUS

Answer 7

• ownership is only one factor affecting performance; depends on how nationalised firm is managed
• some water utilities has been better at keeping costs low and investing to icnrease in supply capacity
• Providing the regulator OFWAT is prepared to use their powers when setting prices and fining ( “in 2017 Thames Water was fined £20m for releasing raw sewage into the Thames) then the sector can improve meeting the changing needs of households and businesses. A good example is the billions of £s being invested building the new London super-sewer.

Question 8

Reasoned judgement on the nationalisation of water industry

Answer 8

• The natural monopoly aspect of the industry suggests that genuine price competition is unlikely.
• right now government cannot afford to take on loss making industries given size of gov debt and 4% of gov spending is debt interest
• I argue that the powers of the industry regulator OFWAT – acting as a surrogate for competition – should be strengthened. They need to avoid allegations of regulatory capture and maintain tough price regulation and higher standards of service year on year so that water utilities meet their environmental targets.
  Households and businesses want a reliable and clean water supply at an affordable price. A well regulated private sector can achieve this best in the long run.

Question 9

Outline the fasct of positive consumption externality of dental treatment

Answer 9

• severe dentist shortages but gov has a new dental recovery plan
• Ministers hope that the money will provide 1.5 million new treatments for people in need of NHS dental care. In 2023, the number of dentists offering NHS dental care fell by 121.
• A new dental van service will be introduced for coastal and rural communities to try and tackle this.
• The Dental Recovery Plan will offer up to 240 dentists £20,000 to work for three years in under-served areas “where recruitment and retention of dentists is difficult”.
• 2023, 54% of children in England had been seen by a dentist in the last twelve months

Question 10

external benefit of dental treatment

Answer 10

• Dental treatment can improve the health of the population (1) raising the productivity of workers (1) increasing output (1) raising living standards (1) providing an external benefit (1).
• Some people may not appreciate the true benefits of dental treatment to themselves
• Some low paid people may not be able to afford dental treatment (1) it is an essential service (1) reduces poverty (1) enables people to spend on other essential goods/services e.g. education (
  BUT
• Some dental treatment is cosmetic (1) not an essential service
• People who do not need treatment may go to the dentist (1) wasting resources

Question 11

Vodafone and three merger facts

Answer 11

• going from the 3rd and 4th largest UK mobile networks to the largest.
• ## A joint venture might be the result of their discussions rather than a fully-fledged merger and integration of the two businesses