Competition policy

• The UK government has established the ‘Red Tape Challenge’, which 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.
• Small and Medium Sized Enterprises (SMEs) are important for creating a competitive market. They create jobs, stimulate innovation and investment and promote a competitive environment.
• Creative destruction

  New entrepreneurs are innovative, which challenges existing firms.
• Creative destruction


  More productive firms grow, whilst the least productive are forced to leave.
• Creative destruction


  Causes an expansion of the economy's productive potential.
• By deregulating or privatising the public sector, firms can compete in a competitive market, which should also help improve economic efficiency.
• Deregulation


  The act of reducing how much an industry is regulated. It reduces government power and enhances competition.
• Excessive regulation is also called ‘red tape’. It can limit the quantity of output that a firm produces.
• Privatisation


  Assets are transferred from the public sector to the private sector. E.g. British Airways was privatised in the UK and now operates in the competitive market.
• Free market economists will argue that 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.
• In the free market, firms have to produce the goods and services that consumers want. This increases allocative efficiency and may mean that products are of a higher quality. Competition means prices are also lower.
• 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.
• The firm which offers the lowest price and best quality of provision wins the government contract. 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.
• It also frees the government of maintenance, since the private sector might have the expertise and knowledge to fulfil the project and maintain the infrastructure.
• However, the private sector might not meet the specification of the contract; the private sector firm might try and cut costs by lowering wages, and they are less likely to have social welfare as a priority.