public policy towards private enterprise industrial economics
TRANSCRIPT
Public Policy towards Private Enterprise
Industrial Economics
Objectives
• The aims of competition policy– 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!
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?
The action is illegal
Yes
Yes
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).
Resource misallocation
Quantity
Price
Demand
Marginal cost
QcQm
Pc
Pm
Spending shift
to other industries
Income transfer
to monopolist
Deadweight
welfare loss
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.
(*) Public utilities includes electricity, gas and water supplySource: OECD, Financial Market Trends
Rationale for state ownership of PublicUtilities
• 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.
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.
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.
Arguments for privatisation
• Increased competition
• increased discipline of capital markets
• reductions in government borrowing
• reductions in government control
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
Regulating the market
Time
Intensity of
regulation
Phase 1:Monopoly
Phase 2: Monopoly and Competition
Phase 3:Competition
Regulationfocuses on theprevention ofmonopolyabuse indownstreammarkets
Competition gradually introduced, regulation deals with retail and access prices, emerging competition issues and public service
obligations.
Light-handed regulationneeded to ensure fair trading practices and themaintenance of publicservice obligations
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
Why do governments intervene?
• Market failure– externalities– large sunk costs– increasing returns to scale– information imperfection
• Paternalist intervention
• Transaction costs
Types of industrial policy
• Passive and negative– regulation of dominant positions & monopolies
• Passive but positive– regulation of dominant positions & monopolies– fiscal, financial and legal measures to aid
competition– deregulation
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
Types of industrial policy
• Active, positive and directly involved– the state acts as an entrepreneur and innovator
Types of industrial policyanother 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.
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.
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.