Intervention to promote competition and contestability

• Why do governments need to promote competition and contestability?

  Reduce market failure
• Methods to promote competition and contestability:

  1. Promotion of small businesses
  2. Deregulation
  3. Competitive Tendering
  4. Privatisation
• What does promotion of small businesses involve?

  • Providing subsidies and/or tax incentives
  • Deregulation (Red tape challenge)
  • Improve access to finance for small businesses
• Why are Small and medium sized enterprises important?

  they create a competitive market as they create jobs, stimulate innovation and investment.
• Why should governments improve access to finance?

  It reduces barriers to entry
• What is 'creative destruction'?

  The idea that new entrepreneurs are innovative, which challenges existing firms.

  The more productive firms then grow, whilst the least productive are forced to leave the market. This results in an expansion of the economy’s productive potential.
• Who made the idea of 'creative destruction'?

  Schumpeter
• What is the 'Red Tape Challenge'?

  aims to simplify regulation for businesses. It is especially aimed towards small businesses. This aims to make it cheaper and easier to meet environmental targets and create new jobs.
• What is deregulation?

  It is the act of reducing how much an industry is regulated. It reduces government power and enhances competition
• What regulation can the government do?

  • Red tape challenge
  • Change taxes within a market
  • Change costs and barriers to entry
  • Nationalisation/Privatisation
• What is red tape?

  excessive regulation. It limits the quantity of output that a firm produces. Eg. Environmental laws and taxes, pollution permits.
• What does removing regulation do to competition?

  Promotes competition which in turn increases the contestability in the market.
• What is Privatisation

  assets are transferred from the public sector to the private sector. The firm is left to the free market and private individuals
• Example of privatization


  British airways
• What do free market economists argue about privitisation?

  the private sector gives firms incentives to operate efficiently, which increases economic welfare. This is because firms operating on the free market have a profit incentive, which firms which are nationalised do not.
• How do consumers benefit?

  Since they are operating on the free market, firms also have to produces the goods and services consumers want. This increases allocative efficiency and might mean goods and services are of a higher quality.

  Competition might also result in lower prices. However, firms which profit maximise in a competitive market might compromise on quality.
• How do governments benefit from privatisation

  By selling the asset to the private sector, revenue is raised for the government. However, this is only a one-off payment.
• What is competitive tendering?

  A common process for awarding government contracts to private companies or organisations.
• Examples of competitive tendering?

  • defence contracts
  • healthcare contracts
  • Infrastructure contracts
  • Transport contracts
  • IT contracts
• What are competitive contracts meant to ensure:

  • transparency
  • fairness
  • value for money
• Why does the government use competitive tendering?

  The government provides some goods and services because they are public or merit goods, and they are underprovided in the free market. The government could contract out this provision, so that private firms operate things such as roads or hospital.
• How does competitive tendering work?

  The firm which offers the lowest price and best quality of provision wins the government contract.
• How does the government benefit?

  1. This saves the government money, since the public sector can be bureaucratic and inefficient. The private sector has an incentive to reduce their costs, since they operate in a competitive market.
  2. Frees the government of maintenance, since the private sector might have the expertise and knowledge to fulfil the project and maintain the infrastructure.
• Evaluating Competitive tendering

  The private sector might not meet the specification of the contract.

  Moreover, the private sector firm might try and cut costs by lowering wages, and they are less likely to have social welfare as a priority
• Arguments for competitive tendering:

  1. Increased competition: encourages competition among suppliers, which can mean better prices and improved quality.
  2. Greater efficiency: By opening up government contracts to private companies, competitive tendering can encourage greater efficiency and innovation in service delivery.
  3. Transparency: Promotes transparency in the procurement process, ensuring that contracts are awarded fairly and openly.
  4. Value for money: Better value for taxpayers' money by encouraging suppliers to offer the best possible price for their services.
• Arguments against competitive tendering:

  1. Limited choice: Can limit the number of suppliers able to bid for contracts, particularly for smaller contracts, which can limit the range of services available.
  2. Reduced quality: Suppliers may prioritize cost-cutting over quality, which can lead to reduced standards of service.
  3. Bureaucracy: The process of competitive tendering can be bureaucratic and time-consuming, which may increase costs and delay service delivery.
  4. Privatization: Of public services, which some argue can undermine public accountability and transparency.
• Potential advantages of de-regulation of markets

  1. Break down barriers to entry, market supply should expand, bringing down prices for consumers
  2. More competition and contestability is strongly associated with improved productive, allocative and dynamic efficiency
  3. Competition limits firms' ability to restrict output and raise prices. By forcing firms to charge a price closer to marginal cost, allocative efficiency improves
• Potential advantages of de-regulation of markets

  1. Less pricing power may mean firm likely to seek profitability through cost reduction, boosting productive efficiency and reducing x-inefficiency
  2. Greater capital investment and productivity may improve dynamic efficiency
• Arguments for privatizations

  1. Private companies have a profit incentive to cut costs and be more efficient and raise productivity
  2. Government gains revenue from the sale of assets
  3. If a state monopoly is replaced by a number of firms this will lead to lower prices. The competitiveness of the macro economy may also improve
  4. Privatisation can create a shareholder democracy i.e. greater share ownership
• Arguments against Privatisation

  1. Social objectives are given less importance
  2. Some activities are best run by the state because they are strategic parts of the economy e.g. water supply, steel and railways
  3. Government loses out on dividends from any future profits; public sector assets often sold too cheaply
  4. Shares are often bought/ held by large institutions such as pension funds, insurance funds and others