Privatization and regulation

Chapter 19 Privatization and regulation David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith 19.1 Nationalization and privatization  Nationalization – the acquisition of private companies by the public sector  Privatization – the return of state enterprises to private ownership and control 19.2 The firm makes profits as shown. Natural monopoly occurs when there is an industry with such economies of scale relative to market demand that only one firm can survive. DD LMC LAC MR Quantity P ri c e Qm Pm The monopoly would produce where MC=MR, with output Qm and price Pm. Q' Pc From society's point of view the optimum position is at PcQ', where MSB = MC. but the monopoly would make a loss if forced to produce at this point, with LAC > AR. 19.3 (2) Two-part tariff: Firm makes a fixed charge to cover the loss made by producing at Q' (the pink rectangle), and a variable charge related to marginal cost. (1) Average cost pricing: Firm sets P=LAC at point G; deadweight loss reduced to GHE. G H Natural monopoly (2) DD LMC LAC MR Quantity P ri c e Q' Pc Alternative pricing policies: E 19.4 Nationalization  Another possibility is to nationalize the industry and provide a subsidy to cover the loss – as was popular in Europe in 1945-80  If nationalized industries make losses, this does not prove they are failing to minimize costs or produce at the socially efficient output – but incentives may be a problem. 19.5 Reasons for nationalization  Natural monopoly  Externalities  e.g. subsidizing public transport (London Underground) may be a second-best option to road pricing.  Equity or distributional consequences  e.g. protecting transport in rural areas  Co-ordinating a network  e.g. British Rail could have an overview of the whole rail system 19.6 Reasons for privatization  Improve incentives for production efficiency – makes managers accountable to shareholders. – but sheltered monopolies will be sleepy no matter who owns them – so privatization will be most successful where there is potential for competition.  Pre-commitment by government not to interfere for political reasons 19.7 Privatization in practice  At 1997 prices, almost £67billion was raised in revenue from privatization in 1980-97.  In terms of widening share ownership, effects were limited  The Private Finance Initiative (PFI) is claimed as an innovative way of drawing on private-sector expertise to finance and manage public projects such as roads and hospitals. 19.8 Regulation  Privatization does not remove the need for regulation  In the UK, regulation has been through price-capping – privatized industries are not permitted to raise prices beyond RPI-X  I.e. real prices must fall.  Regulatory capture occurs when the regulating body comes to identify with the interests of the firm it regulates – eventually becoming its champion rather than its watchdog. 19.9 Chapter 20 Introduction to macroeconomics and national income accounting David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith 20.11 Macroeconomics is ...  the study of the economy as a whole  it deals with broad aggregates  but uses the same style of thinking about economic issues as in microeconomics. 20.12 Some key issues in macroeconomics  Inflation – the rate of change of the general price level  Unemployment – a measure of the number of people looking for work, but who are without jobs  Output – real gross national product (GNP) measures total income of an economy  it is closely related to the economy's total output 20.13 More key issues in macroeconomics  Economic growth – increases in real GNP, an indication of the expansion of the economy’s total output  Macroeconomic policy – a variety of policy measures used by the government to affect the overall performance of the economy 20.14 Inflation in the UK, 1950-99 0 5 10 15 20 25 30 19 50 19 70 19 90 % p. a. Source: Economic Trends Annual Supplement, Labour Market Trends 20.15 Inflation in selected European countries 0 1 2 3 4 5 % change 1998 compared with 1997 Greece Portugal Italy Spain UK Finland EU Belgium France Germany 20.16 Inflation in UK, USA and Germany 0 2 4 6 8 10 12 14 16 % p. a. 1960-73 1973-81 1981-90 1990-98 UK USA Germany 20.17 Unemployment in the UK, 1950-99 0 2 4 6 8 10 12 14 19 50 19 70 19 90 % p. a. Source: Economic Trends Annual Supplement, Labour Market Trends 20.18 Unemployment in selected European countries 0 5 10 15 20 % unemployment (ILO measure) 1998 Greece Portugal Italy Spain UK Finland EU Belgium France Germany 20.19 Unemployment in UK, USA and Germany 0 2 4 6 8 10 % p. a. 1960-73 1973-81 1981-90 1990-98 UK USA Germany 20.20 Economic growth in UK, USA and Germany 0 1 2 3 4 5 % p. a. 1960-73 1973-81 1981-90 1990-98 UK USA Germany 20.21 The circular flow of income, expenditure and output Y Households Firms C + I I C S 20.22 Government in the circular flow Y C + I + G I C S Households FirmsGovernment C + I + G - Te Te G B - Td Y + B - Td 20.23 Adding the foreign sector  To incorporate the foreign sector into the circular flow  we must recognize that residents of a country will buy imports from abroad  and that domestic firms will sell (export) goods and services abroad. 20.24 GDP and GNP  Gross domestic product (GDP) – measures the output produced by factors of production located in the domestic economy  Gross national product (GNP) – measures the total income earned by domestic citizens  GNP = GDP + net income from abroad 20.25 Three measures of national output  Expenditure – the sum of expenditures in the economy – Y = C + I + G + X - Z  Income – the sum of incomes paid for factor services – wages, profits, etc.  Output – the sum of output (value added) produced in the economy 20.26 National income accounting: a summary GNP (and GNI) at market prices GDP at market prices NYA C X - Z I NYA G NNP at basic prices Deprec'n National income Indirect taxes Wages and salaries Self- employment Profits, rents 20.27 What GNP does and does not measure  Some care is needed: – to distinguish between real and nominal measurements – to take account of population changes – to remember that GNP is not a comprehensive measure of everything that contributes to economic welfare