Intervention to protect suppliers and employees

• How can suppliers be protected:

  • Preventing monopsony power
  • Nationalisation
• What is monopsony power?

  When there is a single buyer of one good/service in a market
• Why is monopsony power bad to suppliers?

  It is abusive towards suppliers and over time can change the nature of entire industries in an economy
• What is an example of monopsony power and its effect?

  Supermarkets have monopsony power and has led to many farmers losing profits.
• How do farmers lose out in monopsony power against supermarkets?

  Farmers lose out to supermarket price wars, because supermarkets keep negotiating lower prices from farmers, in order to lower their own prices and compete with other supermarkets. Supplying firms are unlikely to make more than normal profit.
• How does the government protect farmers?

  Governments can regulate this to ensure that farmers are receiving a fair deal.

  For example, farmers in the UK might receive grants and subsidies to support their production. The CMA might investigate supermarket buying power to ensure they are not abusing their monopsony power.
• How can governments deal with monopsony power:

  • Governments can pass anti monopsony laws & issue fines if breaches occur
  • They can encourage firms to self regulate & trade fairly
  • They can appoint a regulator to monitor the practices in the industry
  • They can subsidise firms that are suffering from abusive monopsony power
  • They can set minimum prices which buyers have to pay suppliers
• What is nationalisation?

  When the state takes control and ownership of firms which were in the private sector.
• What does nationalisation do to a market?

  natural monopolies are created.
• Why would it be better to create a natural monopoly?

  This is because it is inefficient to have multiple firms providing a certain good like water
• What type of externalities could nationalisation bring?

  Nationalised industries yield strong positive externalities. For example, by using public transport, congestion and pollution are reduced.
• What are the objectives of nationalised industries?

  They have different objectives to privatised industries, which are mainly profit driven. Social welfare might be a priority of a nationalised industry.
• Diagram to show where nationalised and privatised firms operate

  Privatised firms operate at Q1 P1, which is the profit maximising level of output and price. A nationalised firm is more likely to operate at Q2 P2, which is the allocatively efficient level of output (AR=MC).

  A) MC

  B) AC

  C) AR

  D) MR

  
• How can employees be protected?

  • National minimum wage legislation
  • Legislation on health & safety, working hours & employment conditions e.g. maternity pay
  • Permitting trade unions to operate in the economy (some countries limit or ban the existence of unions as they view them as anti-competitive e.g. Singapore)
  • Encouraging firms to adopt best practice & draw up company codes of conduct towards their employees. This is a form of self regulation
• What is national minimum wage?

  The lowest wage that employers can legally pay their workers
• What are trade unions?

  An organisation that represents the interests of the workers in a particular industry
• Why do employees need to be protected?

  They could be exploited by firm.

  Wage bills for firms are often one of their highest costs as a proportion of expenditure.

  With a goal of profit maximisation firms will always seek to reduce their wage expenditure as this will result in higher profit
• Case for Nationalisation

  1. Nationalised firms can target social objectives
  2. Firms might charge lower prices - not focused on pure profit maximisation / extracting consumer surplus
  3. Natural monopolies in the state sector can achieve economies of scale = gains in productive efficiency
  4. Can be used as a vehicle for hitting macroeconomic aims such as keeping inflation under control
• Case against Nationalisation

  1. Absence of shareholder pressure might lead to diseconomies of scale and therefore higher prices
  2. Lack of market competition can lead to X-inefficiency
  3. Firms may lack an incentive to innovate - leading to a loss of dynamic efficiency
  4. Losses of state-owned firms are absorbed by tax payers and can lead to higher budget deficits
• Nationalisation Case study: Rail Industry

  Should the UK rail industry be nationalised?

  British Rail was essentially divided into two main parts:

  • National rail infrastructure owned, maintained and operated by Network Rail which is a state-owned and "not-for-dividend" company

  • Train operating companies (TOCs) whose trains run on the network - most have multi-year franchises - except London and Merseyside
• Nationalisation Case study: Rail Industry

  Arguments for rail nationalisation

  1. Rail network is a natural monopoly suited to state control to achieve economies of scale
  2. Rail fares can be controlled to improve affordability for rail passengers
  3. Profits flow direct to the taxpayer rather than to shareholders of private train companies
  4. State can direct investment into the network and borrow more cheaply to fund it
• Nationalisation Case study: Rail Industry

  Arguments against rail nationalisation

  1. Competition on lines is more important than who owns the railways - therefore, allow more operators
  2. Private sector firms are more likely to improve dynamic efficiency and avoid X-inefficiencies
  3. Possible to regulate more fares on services run by private train operating companies
  4. History of state-run railways in the UK (e.g. in 1970s and 1980s) was not always positive
• Nationalisation of rail

  Applying economic efficiency concepts

  Productive efficiency

  • Operating costs at peak and off-peak times
  • Capacity utilisation
  • Benefit from economies of scale / avoiding diseconomies of scale

  Allocative efficiency

  • Ticket pricing - prices reflect the marginal costs of providing a service?
  • Effects of price discrimination on consumer welfare
  • Peak and off-peak pricing

  Dynamic efficiency

  • Improvements to customer service - wifi, ticketing systems, apps, refunds, information provision
  • Reliability and safety of trains, frequency of service