1. Griffiths and Wall: Economics for Business and Management 3rd edition© Pearson Education Limited 2011 Slide 8.1 Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012

2. Griffiths and Wall: Economics for Business and Management 3rd edition© Pearson Education Limited 2011 Chapter 8 Privatisation and deregulation Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012 Slide 8.2

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

4. Griffiths and Wall: Economics for Business and Management 3rd edition© Pearson Education Limited 2011 Slide 8.4 Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012 Welfare loss with a quota scheme OQ 2 raising price (P 2 ) above the market clearing level P 1 0 P2P2 P1P1 Q2Q2 Q1Q1 Output D v C w B A S S’ (£) Change in consumer surplus (ΔCS)= − A − B Change in producer surplus (ΔPS)= + A − C Net welfare changes = ΔCS + ΔPS = − B − C Change in consumer surplus (ΔCS)= − A − B Change in producer surplus (ΔPS)= + A − C Net welfare changes = ΔCS + ΔPS = − B − C

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

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

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

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

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

10. Griffiths and Wall: Economics for Business and Management 3rd edition© Pearson Education Limited 2011 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 MC 1 /AC 1 to MC 2 /AC 2. This is termed X-inefficiency and leads to an increase in the price paid. 0 Price Output Q1Q1 Q2Q2 P2P2 D MC 1 =AC 1 P1P1 MC 2 =AC 2 MR

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

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

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