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" Discuss the argument that privatisation and deregulation of electricity supply in a number of advanced economies has led to an unusually high number of blackouts in the recent period."

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Introduction

Introduction to Economic Analysis (Micro) Essay Question - Autumn 2003 " Discuss the argument that privatisation and deregulation of electricity supply in a number of advanced economies has led to an unusually high number of blackouts in the recent period." As we have seen over the last few years in the world's leading countries, e.g. Britain, USA, and other European countries have faced the problem of blackouts which caused chaos in many regions of the country. There are several reasons which caused the recent blackouts - Privatisation and deregulation are among the reasons why recently blackouts have occurred. Thus, we will be looking at the structure of the market and why the electricity supply are differ during the state owned and after privatisation in terms of the cost structure of the market, and other factors which have an affect on post - privatisation market. The cost structure we are likely to find in the provision of electricity is what we called a "Natural monopoly" . By the term natural monopoly, means that a firm becomes dominant in the market resulting from another firm in the industry is not large enough to reduce their average cost to minimum while the average cost of natural monopoly firm keep falling as its output rises due to an economies of scale. ...read more.

Middle

Electricity has inelastic demand therefore, the company by restricting supply at times of shortages could easily sharply increase electricity prices for a few hours. This has happened in the UK, the liberalization of the electricity market in 2001, lead to prices plunged 40% and generators have reduced capacity . Last October, PowerGen shocked the government by mothballing nearly a quarter of its generating capacity and declaring the industry bust. As well as, British Energy, the UK's biggest nuclear power producer, had to be bailed out with a �627m government loan. The deregulation could also caused the consumers into blackouts. It has been shown that Low income families after deregulation have little resources when the bills pile up and have to choose between paying the water bill, the doctor bill or the power bill. A 2002 report by poverty researcher Dr.Meg Powers estimates that more than 27 million low income families in America face electricity shut offs every year. One of the reason which caused blackouts in recent period is due to enron factor, which lead to an increase in competition amongst power suppliers and has cut profit margins of the suppliers resulting to a firm reluctant to make new investments if not absolutely necessary. According to Pers Peterson of the University of California, Berkeley, he pointed out that the problem is that electrical transmission systems are a lot like schools for politicians - it is very easy to defer maintenance on them until things fall apart. ...read more.

Conclusion

Less borrowing leads to lower interest payments and hence less need for taxes, as do reduced subsidies to state industries. Publicly owned industries have no incentive to cut costs because there is little or no mechanism by which government can bear down on costs. There is also often little comparison with what costs might be if reduced to a minimum since the state owned firm is often a monopoly. State owned industries also tend to behave like bureaucracies, where the interests of the workers are as important as the interests of the owners and consumers. A privatized profit maximizing company does have an incentive to reduce cost because reduced cost is translated into higher profit. Hence, privatization leads to greater productive efficiency. Finally, privatization and deregulation is the beginning of the caused of blackouts as it leads to the lack of investment is one of the main problem which underlying the caused of blackouts due to a lack of supply in order to support an increase in demand whereas if the electricity is state owned, it is more likely that there is more stations in order to supply sudden surges. Privatization is also likely to effect the price increase of the electricity which caused many people in chaos. However, this does not mean that privatized firm does not have any advantages to the country, it has incentive to cut cost or to produce with lower cost of input or with better efficiency than state owned firm. ...read more.

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