The Market Mechanism [2]

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  • Created by: ekenny5
  • Created on: 14-04-22 15:51
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  • 4.1.8 The Market Mechanism [2]
    • Public ownership
      • the provision of goods and services by the government
        • eg education and healthcare
      • - greater productive efficiency through EoS    - strategic control of important industries        - ^ welfare       - long term investment strategies        - gov revenues
      • - high initial costs                - discourage private sector investment       - usually less efficient than private firms    - high expenditure - increased debt               - changing political agendas may mean projects are unfinished
    • Privatisation
      • the transference of assets from the gov to privately owned businesses
      • - productive efficiency         - innovation from investment      - allocative efficiency        - competition  - injection to gov from sale
      • - abuse of market power  - lack of public interest           - regulatory issues             - breaking up industries        - short termism - profit over investment      - selling public property
      • horizontally - selling a single supplier
      • vertically - unable to own multiple stages of production
    • Regulation
      • creation of rules and sanctions within an industry to modify the behaviour of firms
      • external (outside the industry) or self-regulation (within the industry)
      • - protect from monopoly power             - encourage low costs        - ensure quality             - reduce monopolistic power
      • - socially inefficient        - costly to gov  - inefficient for firms - less competitive     - regulatory capture           - firms can often get around/ find loop holes in regulation
    • Deregulation
      • the opening up of markets to new competition from the removal of barriers to entry
      • - increased competition     - lower prices for consumers     - regulation is costly             - greater choice             - productive and allocative efficiency        - freedom for firms
      • - natural monopolies may mean private firms become monopolies     - under-provision of goods             - compromise quality              - can lead to crisis - deregulation of the banks leading to the 2008 financial crisis
      • Regulatory capture - regulators acting in the interest of the firms rather than the consumer - sympathetic towards firms
        • Regulation
          • creation of rules and sanctions within an industry to modify the behaviour of firms
          • external (outside the industry) or self-regulation (within the industry)
          • - protect from monopoly power             - encourage low costs        - ensure quality             - reduce monopolistic power
          • - socially inefficient        - costly to gov  - inefficient for firms - less competitive     - regulatory capture           - firms can often get around/ find loop holes in regulation
    • Government intervention
      • market failure causes the need for government intervention
      • price controls - max or min prices to incentivise either consumption or production
        • leads to excess supply/ demand
      • state provision - re-nationalisation
      • Regulation
      • Taxation - discourage consumption and production. Either indirect or direct
        • source of gov revenue
          • can be regressive
      • subsidies - encourage consumption and production
        • costly to the gov & firms become reliant
        • increased competitveness
      • extension of property rights - give responsibility for externalities
      • Pollution permits - internalise externalities and create a market to reduce production
    • Government failure
      • lack of incentives - no profit motive in the public sector
      • poor information
        • asymmetric
      • political goals and interference over economic theory
      • when government intervention leads to an inefficient allocation of resources
      • lack of consistency - changing governments with different aims
      • moral hazard - encourage risk taking if they can fall back on the government
      • regulatory capture
      • unintended consequences - creating new problems/ worsening existing ones when trying to solve them

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