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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
Griffiths and Wall: Economics for Business and Management 3rd edition © Pearson Education Limited 2011
Chapter 8Privatisation and deregulation
Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012
Slide 8.2
Griffiths and Wall: Economics for Business and Management 3rd edition © Pearson Education Limited 2011
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
Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012
Griffiths and Wall: Economics for Business and Management 3rd edition © Pearson Education Limited 2011
Deregulation (2)Slide 8.4
Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012
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
Griffiths and Wall: Economics for Business and Management 3rd edition © Pearson Education Limited 2011
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
Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012
Griffiths and Wall: Economics for Business and Management 3rd edition © Pearson Education Limited 2011
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
Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012
Griffiths and Wall: Economics for Business and Management 3rd edition © Pearson Education Limited 2011
‘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
Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012
Griffiths and Wall: Economics for Business and Management 3rd edition © Pearson Education Limited 2011
‘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
Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012
Griffiths and Wall: Economics for Business and Management 3rd edition © Pearson Education Limited 2011
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
Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012
Griffiths and Wall: Economics for Business and Management 3rd edition © Pearson Education Limited 2011
X-inefficiency (2)Slide 8.10
Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012
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
Griffiths and Wall: Economics for Business and Management 3rd edition © Pearson Education Limited 2011
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
Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012
Griffiths and Wall: Economics for Business and Management 3rd edition © Pearson Education Limited 2011
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
Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012
Griffiths and Wall: Economics for Business and Management 3rd edition © Pearson Education Limited 2011
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
Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012