14/15

• What do economies of scale refer to?

  Cost advantages from expanding production
• What are the types of internal scale economies?

  Purchasing, technical, risk-bearing, managerial, financial, marketing
• Name two firms that exploit scale economies.

  Ryanair and Netflix
• What do diseconomies of scale refer to?

  Rising long-run average costs from over-expansion
• How does Ryanair benefit from economies of scale?

  By bulk-buying jet fuel to lower costs
• What is the effect of Ryanair's expansion on their LRAC?

  It drives down LRAC from C1 to C*
• How does Netflix utilize technical scale economies?

  Through a joint venture with Amazon Web Services
• What is the impact of Netflix's subscriber growth on costs?

  It lowers marginal and average costs
• What happened during the Amazon and Whole Foods merger?

  Cultural clashes led to diseconomies of scale
• What was the effect of the merger on Whole Foods workers?

  They felt demotivated and alienated
• How did the merger affect Amazon-Whole Foods' LRAC?

  It increased LRAC from C1 to C2
• What does privatisation refer to?

  Transfer of ownership to the private sector
• What is nationalisation?

  Transfer of ownership back to the public sector
• Why might there be a case for renationalising the UK rail industry?

  To lower fares and achieve allocative efficiency
• How much have UK rail ticket fares increased since privatisation?

  ~23% in real terms
• What is the flaw in the UK rail industry's model?

  Multiple TOCs eliminate substitute operators
• What is the impact of TOC monopolies on ticket prices?

  They allow significant price-making ability
• What happens to consumer surplus when prices rise?

  It shrinks from area PcAC to P*AB
• What is the effect of price regulation in the rail industry?

  It limits excessive price rises by TOCs
• What is the role of open access operators in the rail industry?

  They offer lower prices on underserved routes
• Why might the water industry need renationalisation?

  To promote dynamic efficiency and investment
• How much debt have UK water monopolies accumulated?

  £58bn
• What has been the impact of privatisation on water investment?

  There has been poor investment and no new reservoirs
• What negative externalities have arisen from the water industry?

  Loss of biodiversity and unsafe water pipes
• How can the government finance water infrastructure improvements?

  By borrowing at a 4% yield on bonds
• Why are water monopolies considered natural monopolies?

  Only one supplier is efficient for a region
• What is the argument for state-run water industries?

  They can better address negative externalities
• What is OFWAT's role in the water industry?

  Regulates prices and sets efficiency targets
• What criticism has been directed at OFWAT?

  It has not enforced sufficient investment by companies
• What might be a more prudent strategy than renationalisation?

  Reforming the regulator, OFWAT
• What is the overall conclusion regarding privatised industries?

  Some work well, others need renationalisation
• What is the current national debt of the UK?

  98% of GDP
• Why is it important to judge industries on a case-by-case basis?

  To ensure efficiency and minimize government failure