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OCR Economics F584 Transport Economics - 10 JUNE 2014
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Original post by mar007
Shouldn't it be a lower AC curve if we're talking about X-effiency rather than X-ineffiency.
woopsy yes! sorry about that!
Original post by Deesanya
what is x-inefficient and the graph for it please?
X-inefficiency occurs when a firm has lack of incentive to cut costs which leads to an increase in the average cost. This is the result of lack of competition. For example, employing additional employees that are not required in the production or firm is not looking for the cheapest supplier.
The diagram of X-inefficient is just price against quantity and draw AC curve shifting upward.
Original post by arjunbels
adveloram tax? surely its a Pigouvian tax which internalises negative externalities?
Ive never heard or being taught of a Pigouvian tax? so i dont know
Original post by arjunbels
Of course not! take into consideration Monopolies, their main objective is to maximise profits, however, it is all dependent on the context of which they sell, for example, if public sector owned, allocative efficiency (MC=AR)would be the main objective. However, with that being said, the only market structure to NOT have profit maximisation as their primary objective is Perfect competition markets because they focus on Productive and Allocative efficiency. Hope this helped!
Actually we assume that all market structures profit maximise - it is an assumption!
Perfect competition profit maximises - they are only allocative efficient because the competition forces them to lower the price to that point.
Original post by arjunbels
Of course not! take into consideration Monopolies, their main objective is to maximise profits, however, it is all dependent on the context of which they sell, for example, if public sector owned, allocative efficiency (MC=AR)would be the main objective. However, with that being said, the only market structure to NOT have profit maximisation as their primary objective is Perfect competition markets because they focus on Productive and Allocative efficiency. Hope this helped!
If public sector owned why would MC=AR necssarily be the main objective?
Surely the objective would just be to maximise output (provision) which could be where AC=AR? As if its govt run they aren't bothered about producer (their own) welfare but are bothered about consumer welfare?
Economies of Scale
Financial - Large firms are more likely - and able - to take larger loans from banks compared to smaller firms. Moreover, they are perceived to hold less risk. Therefore, banks are more willing to lend money to larger firms for greater return on interest. Hence, larger firms are able to take loans at lower interest which reduces their cost of production.
Purchasing - Larger firms have more funding so they can buy raw materials required for production in greater bulk. Hence, they may be able to purchase these at a lower cost per unit as the supplier may discount the price the more that is being bought. Therefore, the firms average cost of production reduces.
Managerial - A large firm would have specialist managers in each of its constituent sectors that increases efficiency in the given sector. Hence, productivity would increase and reduce the average total cost of production.
Technical - Larger firms have the funding available to purchase more technologically efficient capital machinery in greater quantity than smaller firms. Hence, this would increase their efficiency and productivity which reduces the total average cost of production.
Marketing - The larger the firms the more the marketing cost can be spread about its finances. This mean that the cost of marketing become a smaller proportion of the firms overall costs. Meaning that their marketing costs are a smaller proportion of their costs of production.
Diseconomies of Scale - occurs when the firm becomes too large in size and communication and coordination becomes distorted. For example, by the time the information is transferred from one part of the firm to another, it may have changed slightly which affects the firms productivity. Hence, their productivity falls and their average cost of production increases with every additional unit of output.
These are internal economies of scale.
External Economies of Scale - When the industry in which the firm operates expands, giving it access to a greater range of efficient lower costing suppliers. Hence, the firm has access to cheaper suppliers which would decrease their average costs of production.
Fixed costs - Costs that do no vary/change with the level of output i.e. an annual Salary
Variable costs - Costs that vary/change with output i.e. hourly wages.
Financial - Large firms are more likely - and able - to take larger loans from banks compared to smaller firms. Moreover, they are perceived to hold less risk. Therefore, banks are more willing to lend money to larger firms for greater return on interest. Hence, larger firms are able to take loans at lower interest which reduces their cost of production.
Purchasing - Larger firms have more funding so they can buy raw materials required for production in greater bulk. Hence, they may be able to purchase these at a lower cost per unit as the supplier may discount the price the more that is being bought. Therefore, the firms average cost of production reduces.
Managerial - A large firm would have specialist managers in each of its constituent sectors that increases efficiency in the given sector. Hence, productivity would increase and reduce the average total cost of production.
Technical - Larger firms have the funding available to purchase more technologically efficient capital machinery in greater quantity than smaller firms. Hence, this would increase their efficiency and productivity which reduces the total average cost of production.
Marketing - The larger the firms the more the marketing cost can be spread about its finances. This mean that the cost of marketing become a smaller proportion of the firms overall costs. Meaning that their marketing costs are a smaller proportion of their costs of production.
Diseconomies of Scale - occurs when the firm becomes too large in size and communication and coordination becomes distorted. For example, by the time the information is transferred from one part of the firm to another, it may have changed slightly which affects the firms productivity. Hence, their productivity falls and their average cost of production increases with every additional unit of output.
These are internal economies of scale.
External Economies of Scale - When the industry in which the firm operates expands, giving it access to a greater range of efficient lower costing suppliers. Hence, the firm has access to cheaper suppliers which would decrease their average costs of production.
Fixed costs - Costs that do no vary/change with the level of output i.e. an annual Salary
Variable costs - Costs that vary/change with output i.e. hourly wages.
Dynamic Efficiency - through investment in research and development to innovate the firms services and goods. This produces new higher quality and/or efficient goods and services to benefit consumers. Moreover, more efficient methods of production may be produced which would lower the average cost of the firm's production which - if savings were passed onto consumers - lowers the price of the firms products and increase consumer surplus.
Dynamic efficient would be achieved at a greater rate if there was abnormal profit being made.
Abnormal profit benefits the producer by allowing massive producer surplus.
Producer surplus - the difference between the price the supplier is willing to output at and the price actually being output at.
Dynamic efficient would be achieved at a greater rate if there was abnormal profit being made.
Abnormal profit benefits the producer by allowing massive producer surplus.
Producer surplus - the difference between the price the supplier is willing to output at and the price actually being output at.
Why does road pricing shift supply? I know this sounds stupid but the reasoning for most other taxes shifting supply is because they burden of the tax is on the producer (with PED affecting how much of this burden they can pass on to consumers) but in this case all of the burden of the tax is on the consumers of the road?
Discuss the extent to which Privatisation of the UK rail industry has been a success. (20)
L1 L2
- Define Privatisation
- Explain how the UK Rail Industry was privatised
- Privatised in 1997 through franchising by a tendering process that resulted 25 Train Operating Companies (T.O.C.s)
- Government assumed that by removing an absolute statutory barrier to entry (the government) it would make the industry more contestable so there would be efficiency gains.
L3
- Privatising the UK rail industry lowered the barriers to entry --> allowed potential entrants to purchase their way into the industry --> made the UK rail industry more contestable --> in theory as more firms were able to join the market competition increased --> as firms wanted to keep their profit and stay ahead of competitors --> they would lower their costs of production through investing in research and development (R&D) to cut their average costs --> essentially they would aim to price their service at the lowest price --> this would mean that producer surplus is increased and potentially allocative efficiency and productive efficiency is too.
- The private sector has a profit motive which thee government does not --> hence, they would be more likely to invest in the rail industry to improve dynamic efficiency in the long term --> the private sector is able to borrow to invest at a greater extent than the public sector as the UK economy has a large debt --> hence, dynamic efficiency may aid the firm to lower their average cost of production by developing more fuel-efficient trains, if saving are passed on then the consumers would benefit from lower fare prices
- Moreover, it could produce newer higher quality rolling stock for consumers --> this would actually attract more consumers to use the rail and cause modal switching amongst the UK population --> this would aid the integration of transport and potentially reduce the negative externalities caused by congestion by reducing the volume of car use.
- Privatising the UK rail industry allowed the government to gain extra finance to their budget --> they could use this and subsidise other modes of transport such as the bus service industry --> again, the subsidy could be used to improve the quality and efficiency of buses to lower the fare to consumers --> as a result it would make the bus service more attractive and actually encourage modal switching --> aiding integrated transport through the privatisation of the UK rail.
L4
- The private sector do not care about the negative externalities they may cause from providing the rail service --> i.e. the increased level of pollution or noise pollution from more rail services --> the polluter would not pay for their externalities unless they are forced to --> so SC>PC --> hence, society may have to bare a greater volume of negative externalities since the privatisation of the rail industry causing market failure.
- (Draw Natural Monopoly Diagram) --> The UK rail industry is an example of a natural monopoly due to its enormous fixed costs as a proportion of its total costs and its massive economies of scale (this creates a large downward sloping average cost curve as shown in the diagram) --> Through franchising it could be argued that the economies of scale have been fragmented amongst the many smaller individual firms which cannot fully take advantage of their economies of scale and leaving excess capacity because they do not output enough --> hence, this would increase the average total cost of production of the industry which may be passed onto the consumer --> reducing consumer surplus.
- Moreover, as rail is deemed as a necessity to the population it would be unjustly for the natural monopoly to restrict their output and price discriminate in the UK --> Therefore, it is require that they output at the social optimum output MC=AR were allocative efficiency is achieved --> However, in the long run the industry would cease to exist as all firms are making an abnormal loss as the cost of production is greater the the price of the service --> hence, the government subsidises the firms to enable them to produce at the social optimum.
L4+
Whether the privatisation of the UK rail industry has been a success of not is a controversial issue. It would depend on the amount of regulation to ensure that social acceptable output levels of rail services are achieve. Furthermore, it will also depend on the level of competition in the industry - something that the industry lack due to the tendering process that occurs only about once every 8 years. Although, since privatisation there has been an increase in the rail passenger service meaning that the services must have become more attractive over the past decade. However, fare prices are still rising and above the rate of the consumer price index (inflation) too. Though many argue that it is the true market price of the improved service. Overall, I would say that the privatisation of the UK rail industry was actually fairly successful. Nevertheless, we would never know how it would be performing if it was never privatised in the first place.
L1 L2
- Define Privatisation
- Explain how the UK Rail Industry was privatised
- Privatised in 1997 through franchising by a tendering process that resulted 25 Train Operating Companies (T.O.C.s)
- Government assumed that by removing an absolute statutory barrier to entry (the government) it would make the industry more contestable so there would be efficiency gains.
L3
- Privatising the UK rail industry lowered the barriers to entry --> allowed potential entrants to purchase their way into the industry --> made the UK rail industry more contestable --> in theory as more firms were able to join the market competition increased --> as firms wanted to keep their profit and stay ahead of competitors --> they would lower their costs of production through investing in research and development (R&D) to cut their average costs --> essentially they would aim to price their service at the lowest price --> this would mean that producer surplus is increased and potentially allocative efficiency and productive efficiency is too.
- The private sector has a profit motive which thee government does not --> hence, they would be more likely to invest in the rail industry to improve dynamic efficiency in the long term --> the private sector is able to borrow to invest at a greater extent than the public sector as the UK economy has a large debt --> hence, dynamic efficiency may aid the firm to lower their average cost of production by developing more fuel-efficient trains, if saving are passed on then the consumers would benefit from lower fare prices
- Moreover, it could produce newer higher quality rolling stock for consumers --> this would actually attract more consumers to use the rail and cause modal switching amongst the UK population --> this would aid the integration of transport and potentially reduce the negative externalities caused by congestion by reducing the volume of car use.
- Privatising the UK rail industry allowed the government to gain extra finance to their budget --> they could use this and subsidise other modes of transport such as the bus service industry --> again, the subsidy could be used to improve the quality and efficiency of buses to lower the fare to consumers --> as a result it would make the bus service more attractive and actually encourage modal switching --> aiding integrated transport through the privatisation of the UK rail.
L4
- The private sector do not care about the negative externalities they may cause from providing the rail service --> i.e. the increased level of pollution or noise pollution from more rail services --> the polluter would not pay for their externalities unless they are forced to --> so SC>PC --> hence, society may have to bare a greater volume of negative externalities since the privatisation of the rail industry causing market failure.
- (Draw Natural Monopoly Diagram) --> The UK rail industry is an example of a natural monopoly due to its enormous fixed costs as a proportion of its total costs and its massive economies of scale (this creates a large downward sloping average cost curve as shown in the diagram) --> Through franchising it could be argued that the economies of scale have been fragmented amongst the many smaller individual firms which cannot fully take advantage of their economies of scale and leaving excess capacity because they do not output enough --> hence, this would increase the average total cost of production of the industry which may be passed onto the consumer --> reducing consumer surplus.
- Moreover, as rail is deemed as a necessity to the population it would be unjustly for the natural monopoly to restrict their output and price discriminate in the UK --> Therefore, it is require that they output at the social optimum output MC=AR were allocative efficiency is achieved --> However, in the long run the industry would cease to exist as all firms are making an abnormal loss as the cost of production is greater the the price of the service --> hence, the government subsidises the firms to enable them to produce at the social optimum.
L4+
Whether the privatisation of the UK rail industry has been a success of not is a controversial issue. It would depend on the amount of regulation to ensure that social acceptable output levels of rail services are achieve. Furthermore, it will also depend on the level of competition in the industry - something that the industry lack due to the tendering process that occurs only about once every 8 years. Although, since privatisation there has been an increase in the rail passenger service meaning that the services must have become more attractive over the past decade. However, fare prices are still rising and above the rate of the consumer price index (inflation) too. Though many argue that it is the true market price of the improved service. Overall, I would say that the privatisation of the UK rail industry was actually fairly successful. Nevertheless, we would never know how it would be performing if it was never privatised in the first place.
Original post by NPETER
Discuss the extent to which Privatisation of the UK rail industry has been a success. (20)
L1 L2
- Define Privatisation
- Explain how the UK Rail Industry was privatised
- Privatised in 1997 through franchising by a tendering process that resulted 25 Train Operating Companies (T.O.C.s)
- Government assumed that by removing an absolute statutory barrier to entry (the government) it would make the industry more contestable so there would be efficiency gains.
L3
- Privatising the UK rail industry lowered the barriers to entry --> allowed potential entrants to purchase their way into the industry --> made the UK rail industry more contestable --> in theory as more firms were able to join the market competition increased --> as firms wanted to keep their profit and stay ahead of competitors --> they would lower their costs of production through investing in research and development (R&D) to cut their average costs --> essentially they would aim to price their service at the lowest price --> this would mean that producer surplus is increased and potentially allocative efficiency and productive efficiency is too.
- The private sector has a profit motive which thee government does not --> hence, they would be more likely to invest in the rail industry to improve dynamic efficiency in the long term --> the private sector is able to borrow to invest at a greater extent than the public sector as the UK economy has a large debt --> hence, dynamic efficiency may aid the firm to lower their average cost of production by developing more fuel-efficient trains, if saving are passed on then the consumers would benefit from lower fare prices
- Moreover, it could produce newer higher quality rolling stock for consumers --> this would actually attract more consumers to use the rail and cause modal switching amongst the UK population --> this would aid the integration of transport and potentially reduce the negative externalities caused by congestion by reducing the volume of car use.
- Privatising the UK rail industry allowed the government to gain extra finance to their budget --> they could use this and subsidise other modes of transport such as the bus service industry --> again, the subsidy could be used to improve the quality and efficiency of buses to lower the fare to consumers --> as a result it would make the bus service more attractive and actually encourage modal switching --> aiding integrated transport through the privatisation of the UK rail.
L4
- The private sector do not care about the negative externalities they may cause from providing the rail service --> i.e. the increased level of pollution or noise pollution from more rail services --> the polluter would not pay for their externalities unless they are forced to --> so SC>PC --> hence, society may have to bare a greater volume of negative externalities since the privatisation of the rail industry causing market failure.
- (Draw Natural Monopoly Diagram) --> The UK rail industry is an example of a natural monopoly due to its enormous fixed costs as a proportion of its total costs and its massive economies of scale (this creates a large downward sloping average cost curve as shown in the diagram) --> Through franchising it could be argued that the economies of scale have been fragmented amongst the many smaller individual firms which cannot fully take advantage of their economies of scale and leaving excess capacity because they do not output enough --> hence, this would increase the average total cost of production of the industry which may be passed onto the consumer --> reducing consumer surplus.
- Moreover, as rail is deemed as a necessity to the population it would be unjustly for the natural monopoly to restrict their output and price discriminate in the UK --> Therefore, it is require that they output at the social optimum output MC=AR were allocative efficiency is achieved --> However, in the long run the industry would cease to exist as all firms are making an abnormal loss as the cost of production is greater the the price of the service --> hence, the government subsidises the firms to enable them to produce at the social optimum.
L4+
Whether the privatisation of the UK rail industry has been a success of not is a controversial issue. It would depend on the amount of regulation to ensure that social acceptable output levels of rail services are achieve. Furthermore, it will also depend on the level of competition in the industry - something that the industry lack due to the tendering process that occurs only about once every 8 years. Although, since privatisation there has been an increase in the rail passenger service meaning that the services must have become more attractive over the past decade. However, fare prices are still rising and above the rate of the consumer price index (inflation) too. Though many argue that it is the true market price of the improved service. Overall, I would say that the privatisation of the UK rail industry was actually fairly successful. Nevertheless, we would never know how it would be performing if it was never privatised in the first place.
L1 L2
- Define Privatisation
- Explain how the UK Rail Industry was privatised
- Privatised in 1997 through franchising by a tendering process that resulted 25 Train Operating Companies (T.O.C.s)
- Government assumed that by removing an absolute statutory barrier to entry (the government) it would make the industry more contestable so there would be efficiency gains.
L3
- Privatising the UK rail industry lowered the barriers to entry --> allowed potential entrants to purchase their way into the industry --> made the UK rail industry more contestable --> in theory as more firms were able to join the market competition increased --> as firms wanted to keep their profit and stay ahead of competitors --> they would lower their costs of production through investing in research and development (R&D) to cut their average costs --> essentially they would aim to price their service at the lowest price --> this would mean that producer surplus is increased and potentially allocative efficiency and productive efficiency is too.
- The private sector has a profit motive which thee government does not --> hence, they would be more likely to invest in the rail industry to improve dynamic efficiency in the long term --> the private sector is able to borrow to invest at a greater extent than the public sector as the UK economy has a large debt --> hence, dynamic efficiency may aid the firm to lower their average cost of production by developing more fuel-efficient trains, if saving are passed on then the consumers would benefit from lower fare prices
- Moreover, it could produce newer higher quality rolling stock for consumers --> this would actually attract more consumers to use the rail and cause modal switching amongst the UK population --> this would aid the integration of transport and potentially reduce the negative externalities caused by congestion by reducing the volume of car use.
- Privatising the UK rail industry allowed the government to gain extra finance to their budget --> they could use this and subsidise other modes of transport such as the bus service industry --> again, the subsidy could be used to improve the quality and efficiency of buses to lower the fare to consumers --> as a result it would make the bus service more attractive and actually encourage modal switching --> aiding integrated transport through the privatisation of the UK rail.
L4
- The private sector do not care about the negative externalities they may cause from providing the rail service --> i.e. the increased level of pollution or noise pollution from more rail services --> the polluter would not pay for their externalities unless they are forced to --> so SC>PC --> hence, society may have to bare a greater volume of negative externalities since the privatisation of the rail industry causing market failure.
- (Draw Natural Monopoly Diagram) --> The UK rail industry is an example of a natural monopoly due to its enormous fixed costs as a proportion of its total costs and its massive economies of scale (this creates a large downward sloping average cost curve as shown in the diagram) --> Through franchising it could be argued that the economies of scale have been fragmented amongst the many smaller individual firms which cannot fully take advantage of their economies of scale and leaving excess capacity because they do not output enough --> hence, this would increase the average total cost of production of the industry which may be passed onto the consumer --> reducing consumer surplus.
- Moreover, as rail is deemed as a necessity to the population it would be unjustly for the natural monopoly to restrict their output and price discriminate in the UK --> Therefore, it is require that they output at the social optimum output MC=AR were allocative efficiency is achieved --> However, in the long run the industry would cease to exist as all firms are making an abnormal loss as the cost of production is greater the the price of the service --> hence, the government subsidises the firms to enable them to produce at the social optimum.
L4+
Whether the privatisation of the UK rail industry has been a success of not is a controversial issue. It would depend on the amount of regulation to ensure that social acceptable output levels of rail services are achieve. Furthermore, it will also depend on the level of competition in the industry - something that the industry lack due to the tendering process that occurs only about once every 8 years. Although, since privatisation there has been an increase in the rail passenger service meaning that the services must have become more attractive over the past decade. However, fare prices are still rising and above the rate of the consumer price index (inflation) too. Though many argue that it is the true market price of the improved service. Overall, I would say that the privatisation of the UK rail industry was actually fairly successful. Nevertheless, we would never know how it would be performing if it was never privatised in the first place.
More L4 arguments:
- Some would argue the extent to which rail privatisation can be viewed as a success is dependent upon the relative importance you place on individual objectives, for example reducing road congestion vs removing x-inefficiency, rail privatisation has failed to reduce road congestion and so has been unsuccessful in that aspect, but rail privatisation has been successful in another objective, removing x-inefficiency by encouraging competition and profit maximisation both of which encourage firms to become more productively efficient and cut their unnecessary additional costs of production. But generally the view an individual will take on whether it has been a success or not is dependent upon the objective you find of critical importance.
- More stakeholders has made the process more complicated and divided - conflicts between TOCs interests have sometimes reduced efficiency and consumer service -e.g. strikes. Furthermore with privatisation shareholders interests now play a large role in the decision making - this means certain choices could be made to only benefit the shareholders themselves, rather than the wider group of the TOCs and the public at large - compromises to public safety, e.g. Hatfield crash
- Arguably its too early to tell and it depends on whether the current state of rail transport significantly improves in the future or not, as of now privatisation has not been very successful. (obviously an opinionated judgement here)
(edited 9 years ago)
Original post by Vivixn
Can someone help me with a 20 marker please!!
"Discuss the effects of ^ concentration in the transport market"
"Discuss the effects of ^ concentration in the transport market"
Concentration measures the degree to which there is rivalry and competition within a market. Increased concentration means there is less rivalry and competition as a small number of firms are dominating the market. Oligopoly and monopoly are highly concentrated markets.
Bad effects of ^ concentration: Talk about the cons of oligopoly/ monopoly u can use oligopoly/ monopoly diagram
- Less competition > no incentive to minimise AC to compete with rivals > not productively efficient
- Less competition > profit max., no need to produce what society wants best as they don't have much choice > allocative inefficiency
- Less competition > no incentive to invest in R & D > no dynamic efficiency
Good effects of ^ concentration:
-Can earn abnormal profits > used to invest in better quality goods/ service or more efficient production techniques > dynamic efficiency
-Each firm is large > gain more EoS e.g. bulk buying, financial > lower AC > lower prices made possible
Evaluation:
-depends on the extent of increase in concentration e.g. if C5 concentration ratio is 40% and increased to 42% that has insignificant effect compared to an increase from 40% to 80%.
-depends on the number of firms started off with, if from 2 firms to 1 then still very concentrated before so not much effect
-depends on contestability of the market. If contestable but increased concentration, then incumbent firms may still charge low prices because of threat of competition.
Original post by JamieF95
Why does road pricing shift supply? I know this sounds stupid but the reasoning for most other taxes shifting supply is because they burden of the tax is on the producer (with PED affecting how much of this burden they can pass on to consumers) but in this case all of the burden of the tax is on the consumers of the road?
I swear it'd just be because the cost of travel gets more expensive so road users have less incentive to travel, lower income families make cutbacks etc - in general supply reduces as less people are willing to accept the new price than before. Also revenue gained by the government from road pricing can be used to increase the demand of another mode of transport e.g. rail via investment, so more road users going by rail instead (Carrot and stick approach)
(edited 9 years ago)
Original post by forsparta
More L4 arguments:
- Some would argue the extent to which rail privatisation can be viewed as a success is dependent upon the relative importance you place on individual objectives, for example reducing road congestion vs removing x-inefficiency, rail privatisation has failed to reduce road congestion and so has been unsuccessful in that aspect, but rail privatisation has been successful in another objective, removing x-inefficiency by encouraging competition and profit maximisation both of which encourage firms to become more productively efficient and cut their unnecessary additional costs of production. But generally the view an individual will take on whether it has been a success or not is dependent upon the objective you find of critical importance.
- More stakeholders has made the process more complicated and divided - conflicts between TOCs interests have sometimes reduced efficiency and consumer service -e.g. strikes. Furthermore with privatisation shareholders interests now play a large role in the decision making - this means certain choices could be made to only benefit the shareholders themselves, rather than the wider group of the TOCs and the public at large - compromises to public safety, e.g. Hatfield crash
- Arguably its too early to tell and it depends on whether the current state of rail transport significantly improves in the future or not, as of now privatisation has not been very successful. (obviously an opinionated judgement here)
- Some would argue the extent to which rail privatisation can be viewed as a success is dependent upon the relative importance you place on individual objectives, for example reducing road congestion vs removing x-inefficiency, rail privatisation has failed to reduce road congestion and so has been unsuccessful in that aspect, but rail privatisation has been successful in another objective, removing x-inefficiency by encouraging competition and profit maximisation both of which encourage firms to become more productively efficient and cut their unnecessary additional costs of production. But generally the view an individual will take on whether it has been a success or not is dependent upon the objective you find of critical importance.
- More stakeholders has made the process more complicated and divided - conflicts between TOCs interests have sometimes reduced efficiency and consumer service -e.g. strikes. Furthermore with privatisation shareholders interests now play a large role in the decision making - this means certain choices could be made to only benefit the shareholders themselves, rather than the wider group of the TOCs and the public at large - compromises to public safety, e.g. Hatfield crash
- Arguably its too early to tell and it depends on whether the current state of rail transport significantly improves in the future or not, as of now privatisation has not been very successful. (obviously an opinionated judgement here)
These are really good thanks a lot -
I think the second point is the easiest to expand on:
Depending on the objective of the firms, privatisation could be torn between the stakeholders. Essentially, the success of the UK rail privatisation would ultimately depend on the perspective of the stakeholder. If the firms aim to please their shareholders by maximising profits then they may start cutting cost in safety and employment. Alternatively, the firm may avoid long-term costly investment projects which would improve the sustainability of the industry to please the shareholders. These results of privatisation would be considered as a success to shareholders and unsuccessful to consumers and workers. Hence, the general view of an individual will dependent upon the objective of the firm and whether you find it of critical importance.
With that I was able to make another point
Thanks for thatOriginal post by NPETER
Discuss the extent to which Privatisation of the UK rail industry has been a success. (20)
L3
- Privatising the UK rail industry lowered the barriers to entry --> allowed potential entrants to purchase their way into the industry --> made the UK rail industry more contestable --> in theory as more firms were able to join the market competition increased --> as firms wanted to keep their profit and stay ahead of competitors --> they would lower their costs of production through investing in research and development (R&D) to cut their average costs --> essentially they would aim to price their service at the lowest price --> this would mean that producer surplus is increased and potentially allocative efficiency and productive efficiency is too.
- Moreover, as rail is deemed as a necessity to the population it would be unjustly for the natural monopoly to restrict their output and price discriminate in the UK --> Therefore, it is require that they output at the social optimum output MC=AR were allocative efficiency is achieved --> However, in the long run the industry would cease to exist as all firms are making an abnormal loss as the cost of production is greater the the price of the service --> hence, the government subsidises the firms to enable them to produce at the social optimum.
L3
- Privatising the UK rail industry lowered the barriers to entry --> allowed potential entrants to purchase their way into the industry --> made the UK rail industry more contestable --> in theory as more firms were able to join the market competition increased --> as firms wanted to keep their profit and stay ahead of competitors --> they would lower their costs of production through investing in research and development (R&D) to cut their average costs --> essentially they would aim to price their service at the lowest price --> this would mean that producer surplus is increased and potentially allocative efficiency and productive efficiency is too.
- Moreover, as rail is deemed as a necessity to the population it would be unjustly for the natural monopoly to restrict their output and price discriminate in the UK --> Therefore, it is require that they output at the social optimum output MC=AR were allocative efficiency is achieved --> However, in the long run the industry would cease to exist as all firms are making an abnormal loss as the cost of production is greater the the price of the service --> hence, the government subsidises the firms to enable them to produce at the social optimum.
Sorry, 2 questions:
- once these franchisees have won the right to operate the franchise, are they not operating a monopoly therefore there is no competition at all?
- why does it require they operate at MC=AR, wouldn't they be allowed to operate wherever they like as long as output is high enough to satisfy demand and prices are not too high? Therefore they could operate where AC=AR
Original post by mar007
Anyone know how to tackle a 15/20 mark question about CBA ?
15 marker
L1 L2
- Decision making process that weighs up the costs and benefits of a project to calculate a NPV.
- Only when the net present value is positive SB>PB does the project becomes pursued.
L3
- explain that all costs and benefits are gathered and weighed accordingly to importance
- Enumeration: Shadow pricing = i.e time loss in hours * wage per hour * number of people, user cost, cost to businesses, cost of depreciation, compensation cost
- discounting for future benefits and costs --> essentially the benefits in the present are > than in the future due to inflation (which reduces the value relative to the present)
- sensitivity analysis = the likely hood of a benefit/ cost occurring
- Calculate NPV
- compare NPV
20 marker (do above)
L4
- uncertainty in averages used
- unpredictable exogenous shocks on economy
- forecasts could just be wrong
- how to price INTANGIBLE externalities?
- NPV is as accurate as the data used
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