Griffiths and Wall: Economics for Business and Management 3rd edition© Pearson Education Limited 2011 Slide 8.1 Griffiths and Wall, Applied Economics 12th

Griffiths and Wall: Economics for Business and Management 3rd edition © Pearson Education Limited 2011

Slide 8.1

APPLIEDECONOMICS

Griffiths and Wall , Applied Economics 12th Edition © Pearson Education Limited 2012

EDITED BY

ALAN GRIFFITHS & STUART WALL


Chapter 8Privatisation and deregulation

Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012

Slide 8.2


Deregulation (1)

• Removal of rules and regulations

• Potential benefits include– Opening markets up to competition

– Removing obstacles to business efficiency

– Raising economic welfare (i.e. consumer + producer surplus)

Slide 8.3



Deregulation (2)Slide 8.4


Welfare loss with a quota scheme OQ2 raising price (P2) above the market clearing level P1

0

P2

P1

Q2 Q1 Output

D

vC

w

BA

SS’

(£)

Change in consumer surplus (ΔCS)= − A − BChange in producer surplus (ΔPS)= + A − CNet welfare changes = ΔCS + ΔPS = − B − C


Privatisation: case for

• Greater efficiency

– Public choice theory

– Property rights theory

– Avoids X-inefficiency

• Greater managerial freedom

• Wider share ownership

• More government revenue

Slide 8.5



Greater efficiency

• The suggestion here is that the breaking up of state monopolies (deregulation) and the use of private sector companies to supply the good or service, increases the efficiency of provision

• The following three ‘theories’ support this efficiency argument

Slide 8.6



‘Public choice’ theory

• This sees politicians and civil servants as seeking to maximise their own interests rather than those of the consumers of the public sector (nationalised) industry

• Politicians seek votes, civil servants seek to ‘please’ their departments (headed by politicians)

Slide 8.7



‘Property rights’ theory

• This sees the owners of public sector/ nationalised industries (i.e. the public) being unable to exercise effective control over them

• The public is a broad set of people who cannot influence the policies of the public sector/nationalised industries in the same way as shareholders who have voting rights and can directly influence companies (e.g. at AGMs or by selling shares etc.)

Slide 8.8



X-inefficiency (1)

• This sees public sector/nationalised industries as being under less pressure to maximise profit (revenue minus cost) than their private sector counterparts

• As a result the public sector may be content to allow costs to be higher than they need be

Slide 8.9



X-inefficiency (2)Slide 8.10


Firms operating in the public sector without the competitive pressure may find that they become inefficient with an increase in their costs from MC1/AC1 to MC2/AC2. This is termed X-inefficiency and leads to an increase in the price paid.

0

Price

OutputQ1Q2

P2

D

MC1=AC1

P1

MC2=AC2

MR


Other arguments for privatisation

• As well as greater efficiency, other arguments include:

– More managerial freedom: e.g. no longer dependent on government for finance for investment

– Wider share ownership: privatisations allow the public to buy shares in these industries

– More government revenue: the public purse benefits from the revenue raised from selling shares in the newly privatised industries

Slide 8.11



Privatisation: case against

• Simply converts state monopoly to private monopoly

• Need for bureaucracy to regulate private monopoly

• In practice the concentration of share ownership tends to increase

• Loss of government revenue

Slide 8.12



Regulation and Regulators

• Regulators try to limit the possible abuse of market power in the privatised industries

• Establishing a price cap: this method is to set a maximum price

• Encouraging new market entry: another method is to reduce the barriers to entry facing new firms

Slide 8.13


Documents

Griffiths and Wall: Economics for Business and Management 3rd edition© Pearson Education Limited 2011 Slide 8.1 Griffiths and Wall, Applied Economics 12th