1. Public Policy towards Private Enterprise
Industrial Economics
Public Policy towards Private Enterprise

2. Objectives The aims of competition policy State intervention
Per Se v The rule of reason
Resource misallocation v Consumer Welfare
State intervention
Private v State ownership
Regulating markets
Industrial Policy (being proactive and not reactive)
The Colonna report
The future!

3. How the per se process should work.
Does the restraint have efficiency creating potential?
Are the markets shares of the firms involved large enough to make the restriction of output profitable?
Yes
Yes
The action is illegal

4. Resource misallocation v Consumer Welfare
One issue is
whether antitrust policy should minimise the resource misallocation effects of market power (which is the deadweight loss) or
should antitrust policy minimise consumer injury from the exercise of market power (which is the deadweight loss and the transfer of income from consumers to producers).

5. Resource misallocation
Price Pm
Income transfer
to monopolist
Deadweight
welfare loss
Marginal cost Pc
Spending shift
to other industries
Demand Qm Qc
Quantity

6. What is Privatisation?
Privatisation refers to the processes by which assets or activities owned and controlled by the public sector are subjected to market forces.
These include
the closure of plants in ‘sunset’ industries;
the competitive tendering for activities once carried out solely by public service organisations;
the deregulation of markets; and
the transfer of assets to the private sector by share flotation or private sale.

7. (*) Public utilities includes electricity, gas and water supply
Source: OECD, Financial Market Trends

8. Rationale for state ownership of Public Utilities
social ownership of production
allow economic planning of key sectors
distribute income
positive externalities
create a less adversarial industrial relations environment
the existence of Natural monopoly.

9. Rationale against state ownership of natural monopolies
Public Choice Theory
Govt employees motivated by self interest and not the public interest.
Politicians shape policies to maximise votes, justifying any kind of policy as in the public interest; even though this may involve considerable tax burdens.

10. Rationale against state ownership of natural monopolies
Property Rights Theory
There is no direct interest in the yield from state assets because there are no shareholders (i.e. owners with property rights).
Management is less constrained in nationalised industries. Poor management will not depress the capitalised value of the enterprise and tend not to be visible.

11. Arguments for privatisation
Increased competition
increased discipline of capital markets
reductions in government borrowing
reductions in government control

12. Issues resulting
sunk costs due to networks which led to some networks having to be separated from service providers.
in some areas, e.g. energy, competition has been slow in coming.
Use of Chadwick-Demsetz auctions. e.g. railway routes

13. Regulating the market Phase 1: Monopoly Phase 2: Monopoly
Intensity of
regulation
Phase 1:
Monopoly
Phase 2: Monopoly
and Competition
Phase 3:
Competition
Competition gradually introduced, regulation deals with retail and access prices, emerging competition issues and public service obligations.
Regulation
focuses on the
prevention of
monopoly
abuse in
downstream
markets
Light-handed regulation
needed to ensure fair
trading practices and the
maintenance of public
service obligations
Time

14. Regulating the market
UK regulators have practised the RPI-X scheme (with variations depending on the industry) where RPI refers to the retail price index and x is a cost efficiency factor determined by the regulator.
X is determined by
the costs and structure of the firms asset base
expected efficiency gains through enhanced productivity
future demand expectations
future investment plans
the expected impact of the regulation on competition

15. Why do governments intervene?
Market failure
externalities
large sunk costs
increasing returns to scale
information imperfection
Paternalist intervention
Transaction costs

16. Types of industrial policy
Passive and negative
regulation of dominant positions & monopolies
Passive but positive
fiscal, financial and legal measures to aid competition
deregulation

17. Types of industrial policy
Active but negative
sectoral and defensive trade policies to curb threats from emerging economies
Active and positive
co-ordination of national economic policies
the state acts as a supplier of capital
‘picking the winner’ policy

18. Types of industrial policy
Active, positive and directly involved
the state acts as an entrepreneur and innovator

19. Types of industrial policy another way of classifying
A minimalist approach
The favourable economic environment approach
The active, negative sectoral policy approach
The active co-ordinator approach
Direct involvement in production.

20. The Colonna Report (1970) Creation of a single market.
Harmonisation of company & banking laws and taxation.
Promotion of trans-community mergers.
Promote new technology.
Integrate social and regional policies.
Develop a community commercial policy with 3rd countries.

21. A future European industrial policy?
Completion of a favourable European business environment.
Building up of European filières, clusters and business districts.
Building up of Euro-champions.
Provide the finance to develop a European system of innovation.
A concerted policy vis-à-vis third countries.