MICRO GOVT INTERVENTION

Question 1

WHAT IS NATIONALISATION?

Answer 1

TAKING OF COMPANIES INTO STATE OWNERSHIP.

Question 2

What are the advantages of nationalisation?

Answer 2

1. lower prices
2. Increased employment + fair wages
3. Eos from 1 producer
4. Govt more likely to consider externalities
5. No incentive to lower quality
6. All have access to essential goods and services.

Question 3

What are the disadvantages of nationalisation?

Answer 3

1.X -inefficiency
2. Makes a loss so must be subsidised
3. Loss = less dynamic efficiency = less innovation
4. Less choice

Question 4

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What is Privatisation?

Answer 4

The transfer by state owned assets to Private ownership

Question 5

What are examples by privatisation in the UK?

Answer 5

British Gas 1986
British Airways 1987
Thames water 1989
Royal Mail 2013

Question 6

What is deregulation?

Answer 6

Involves removing govt-imposed restrictions legislation and laws in a particular market. By removing barriers to entry, this may allow new firms to enter the market and create competition.

Question 7

Why have deregulation?

Answer 7

1. Regulatory capture and asymmetric info means that price/profit capping and fines may not work as a sub for competition - deregulation introduces real competition which could lead to more efficiency and lower prices

Question 8

Why may deregulation fail?

Answer 8

1. Many of these industries r natural monopolies and so there are cost advantages to have just 1 provider
2. Providers may “cream” i.e focus on the profitable part of the market e.g city centre buses at the exclusion of less profitable parts e.g rural bus services
3. New providers may not provide a higher quality service
4. If there are few competitors there is a risk of collusion

Question 9

How are privatised monopolies regulated?

Answer 9

1. Price capping
2. Profit capping
3. Performance targets

Question 10

What is the price capping formula?

Answer 10

RPI - X + K

RPI = inflation
X = reduction in X-inefficiency
K = investment allowance

Question 11

How long are price caps set for?

Answer 11

Usually a 4-5 yr period

Question 12

What are the advantages of price caps?

Answer 12

1. Avoids abuse of market power through price gouging
2. X part of formula forces some efficiency gains
3. Incentive for further efficiency gains
4. K part of formula allows for dynamic efficiency

Question 13

What are the disadvantages of price capping?

Answer 13

1. Asymmetric info make it hard to find accurate info from the privatised companies and therefore set appropriate value for X
2. Regulatory capture could lead to X being too low
3. Could reduce quality to make efficiency savings if X is too high
4. Can lead to under-investment if K is too low

Question 14

How do performance targets work?

Answer 14

Ensures that the quality of service provided to consumers is of a high enough standard e.g 90% if trains on time. Failure to meet target results results in a fine e.g Southern rail fined £13.4m for poor performance.

Question 15

What are the advantages of performance targets?

Answer 15

Ensures that firms don’t cut corners on quality to lower prices.

Question 16

What are the disadvantages of performance targets?

Answer 16

1. Can game the system e.g a train company may make the official journey time longer or may cut stops to improve their punctuality figures
2. Can be hard to judge performance effectively e,g train service could be late due to bad weather or actions by passengers

Question 17

How does profit capping work?

Answer 17

Sets a limit to the profits a firm can make e.g £6m per yr e.g Labour proposal on private NHS providers.

Question 18

What are the advantages of profit capping?

Answer 18

1. Stops firms from exploiting consumers as they can’t keep additional profit
2. More straightforward to calculate compared to the RPI - X + K formula

Question 19

What are the disadvantages of profit capping?

Answer 19

1. Provide little incentive to be efficient once the profit cap has been met whereas with RPI - X + K firms can keep any additional efficiency gains or profit
2. Can just increase prices rather than cut costs to increase profit which lowers consumer surplus
3. Due to asymmetric info, they may struggle to calculate how much profit is reasonable

Question 20

What are the advantages of privatisation?

Answer 20

1. Higher choice
2. Profit motive + increased competition = less productive inefficiency
3. Higher profits = investment = dynamic efficiency = innovation
4. Less burden on public finances

Question 21

What are the disadvantages of privatisation?

Answer 21

1. Public sector monopoly may be replaced by a private sector monopoly producing at the profit maximising point and charging higher prices
2. Profit motive = incentive to lower quality + lower wages and/or employment
3. Negative externalities not considered by firm
4. Need to appoint regulator to monitor firm