Many believe that inflation can be looked at as another market failure, particularly wild fluctuations of the level of inflation. This has many causes but if we limit it to the labour supply as above we can see how through unionised labour the labour market can greatly affect other markets forcing price rises and inflation. The government can intervene in many ways and reduce the union’s power and thus prevent the monopoly or oligopolies that unions have over the labour market.
Market Power
Perfect Competition is rarely to be found in any market, the existence of Oligopolies and Monopolies lead to market Failure unless there is government intervention to discourage or indeed outlaw such practises. Some industries however experience natural monopolies which require government regulation to ensure a fair deal for the customer.
De-merit Goods
In a truly free market without any government intervention then any good from which a profit can be made would be supplied, this includes drugs, atomic bombs, pornography etc. all of which would be unregulated. This is where Smith (1776) falls flat on his face. Many individuals self interest would lead them to paedophilia, drug use and many other anti-social acts and behaviour. The supply of such de-merit goods must be controlled and is done so by government intervention and the illegalising of many such goods. It should be noted however that most of these goods are still available in the under-ground or black markets that exist even though the government expends a great deal of effort to eradicate these markets.
Externalities
Many externalities that are produced within markets can be looked at as a market failure; the government again can intervene in these for the benefit of society.
An externality is said to be present when the production or consumption of a good directly affects those not directly involved in the exchange of it and when those spill over effects are not reflected in market prices. The spill over effects are known as external costs or benefits. Externalities may arise from either production or consumption activities. These externalities can be; positive, external benefits or negative, external costs. If left to the market the method of production and consumption would always be that of the least costs, which all too often is the choice with the highest external costs. Government intervention can ensure that these costs are met either directly by ensuring waste etc. is disposed of efficiently at a cost to the producer or consumer or indirectly by raising taxes on such goods to limit demand.
Public Expenditure
Contrary to what many believe, the government is not a bottomless pit of money that can spend as it sees fit for the benefit of society. Mrs Thatcher was perhaps almost right when she compared the countries economy to that of a household economy. Most households have a limited supply of income and from that income it must budget how to spend the money to satisfy the requirements of the household. The government is subject to the same constraints.
Decisions have to be made how to provide the country with the services that it requires and to what extent can they afford to be spending on each service. The following table and chart demonstrates how the budget for each department has been set according to the governments spending plan and how this has changed from 1997/98 to 2001/02. The figures supplied by J. Cole (2003) and are in £ Billion’s
The table and chart above show some of the changes in priority that the government has set. For example more recently they have chosen to pay less interest on the national debt. Other Spending has increased dramatically, so much so that the figures may well be inaccurate. In every sector other than the debt interest there is a budget increase, particularly in social security, health and education. This is to be expected as the governments main three promises if re-elected were to increase these three areas. Indeed it can be seen from the totals that spending has risen by a staggering £100 billion. Some of this amount of course will be the result of inflation, but with that being about 2% it by no means accounts for a rise of over 25% in government spending.
Public spending recently has had to follow a frame work, the principles of which are:
- Spending has to be consistently planned for the long-term; it must be prudent and has to be transparent and open to scrutiny.
- It is to be achieved by using policy outcomes, must fit with the long-term goals of government.
- Incentives will be in place to ensure departments create long-term plans and work in each others interests.
- Capital assets will be costed appropriately to allow the most efficient long-term investment.
The Government has also set itself Fiscal Rules for the economy which it must abide by in the 1997 Financial Statement and Budget report.
“1.19 Stable public finances are the second key requirement for long-term economic stability. The Government's fiscal policy will be guided by two strict rules:
- the golden rule: over the economic cycle the Government will only borrow to invest and not to fund current expenditure; and
-
Public debt as a proportion of national income will be held over the economic cycle at a stable and prudent level.” ( The Stationary Office,1997)
It was hoped that by introducing these controls on government spending and borrowing, the British economy would see an increase in investment and a reduction in borrowing. By defining between current expenditure and investment for the future, the government is able to insist that current spending be met by the generation that is currently using these services by means of taxation thus allowing investment for future generations to be financed by borrowing. The golden rule will be met if current spending is paid for by taxation and other government receipts: in other words, if the public sector current account is in balance, or in surplus, over the economic cycle.
The principles of the public spending framework can be seen in the methods used in budgeting and control of the public expenditure. These involve using an assortment of abbreviations that will be explained in turn. They are; DEL’s, AME’s, TME’s with a little help from; EOF, CMF, and ISB.
Department Expenditure Limits (DEL’s)
Departmental Expenditure Limits (DELs) are firm plans for three years in most cases of each department's expenditure. In general the DEL will cover all running costs and most programme expenditure. In a few exceptional cases, spending is not recorded in DEL but is instead in departmental Annually Managed Expenditure (AME) because it cannot reasonably be subject to close control over a three year period.
Annually Managed Expenditure (AME)
Annually Managed Expenditure (AME) is spending included in Total Managed Expenditure which does not fall within Departmental Expenditure Limits (DELs). Expenditure in AME is generally less predictable and less easy to control than expenditure in DEL. For example: The Department of Social Security are unable to turn people away once a limit has been reached, its expenditure, though it may be estimated it cannot be set.
Total Managed Expenditure (TME)
Total Managed Expenditure (TME) is a description of aggregate public spending derived from national accounts. It is the consolidated sum of current and capital expenditure of central and local government, and public corporations.
TME can also be used to measure the budgets of public sector bodies as it gives a total expenditure by department.
All three of the above according to the golden rule will be funded by taxation and not by borrowing. However there are the other three bodies mentioned above from which departments can bid for some increase in budgets, these however have dedicated goals for which the funding must be used.
The Employment Opportunities Fund (EOF)
This is mainly funded by the windfall taxes from Private Utilities and can be bid into to fund employment opportunities such as the £14.5 million given to government and business partnership called ‘Ambition IT.’ in 2001 which aims to create 5000 new jobs in the IT sector and self finance the training requirements.
The Capital and Modernisation Fund (CMF)
The Capital Modernisation Fund was set up to sustain capital investment and advance public services. The Fund is allocated on a competitive basis and uses the following criteria: the amount the project applies genuinely innovative approaches to service delivery; the excellence and strength of the economic appraisal of the plan; the impact on the effectiveness and efficiency of the service; how far the scheme contributes to the department’s objectives; how far the project is genuinely supplementary; and the strength of arrangements for delivering, managing, accounting, monitoring and evaluating the project. In theory one must suppose that this can be funded from borrowing and not necessarily from revenue as it is for future investment.
The Invest To Save Budget (ISB)
This allows departments to bid for investment capital where they are aiming to work in co-operation with other departments, perhaps a topical issue at present is the emergency operator system we access by dialling 999. At present each emergency service has its own emergency control rooms. All too often two or more of these services are required at the scene, this involves each services control rooms being contacted and them in turn dispatching there local crew’s. The (ISB) is currently funding three integrated emergency response pilot schemes which have joint control centres. If successful these joint control centres will be more efficient and cost effective.
Advantages and Disadvantages of Public Sector
The advantages and Disadvantages of the government providing certain goods and services will vary greatly depending on ones circumstances. In general however there tend to be certain pros and con’s that most of us would agree with.
Advantages:
Public and merit goods can be provided at a price that is cheap if not free at the point of consumption, they are available to all. Although not renowned for it, if a profit is made from a public service it can provide revenue for the government rather than profit for individuals who may not spend the money in our economy. Externalities can be better controlled as profit is not the motive of production. Natural monopolies do exist, it would be better to have these in public ownership to ensure consumer protection and also exploit the economies of scale again for the benefit of society rather than capitalist owners.
Disadvantages:
The government as discussed previously has limited resources, therefore it must limit the choices available, as there is a lack of incentive in public corporations due to lack of competition this tends to manifest itself in inefficiency. This in turn leads to lack of quality of goods and services. The government ultimately consists of the cabinet sitting and forecasting on future events, this can lead to wrong decisions being taken, that due to the scale are not only expensive but often impossible to reverse.
Nationalisation V’s Privatisation
If the government was to opt for an economy based on nationalisation wherever possible it would lead to better control over the economy. Services and production could be set at levels to ensure the availability of merit and public goods for everyone and have almost complete control over goods and services it felt to be de-meritorious. Education, training and employment could be tailored to meet demands, Industry also could be tailored and located to efficiently utilise resources. The long slow process of dematerialising the citizens of Britain could begin, at present in Britain as with every Capitalist society, its citizens are greedy, we worship money and possessions more reverently than we have ever worshiped any god. This process needs to start in education which is feasible even in today’s capitalist society, as education fortunately is still government controlled, however it is a capitalist government and as such uses the education system to further the capitalist ideals. A nationalised economy could concentrate more on rectifying the harm that has been done to the earth and civilization as a result of two centuries worth of rape and pillage of the earth’s resources, by reducing negative externalities and actively pursuing positive ones. As consumers we measure our wealth in pounds or how many televisions we have or what sort of car we drive. If we continue to measure our economic growth by such measures as GDP then Nationalisation will provide more drawbacks than advantages. Nationalisation inevitably leads to inefficiency within the nationalised industry, although economies of scale will initially look more efficient on the surface, the lack of competition will eventually lead to inefficiency. Goods and services will be limited to a greater extent and the quality will fall, which will result in fewer exports and more imports as a better range of goods of better quality will be available from other countries, indeed due to the inefficiency of nationalisation they may even be available cheaper.
Privatisation on the other hand brings the advantage of choice and the most efficient distribution of resources. It gives everyone the opportunity of ownership and the financial rewards that that may entail. Efficiency levels should be at there optimum as producers try to reduce their costs and maximize their profits. However profit maximization will often be to the detriment by way of increased social costs. Industry totally devoid of government intervention will supply to a market irrespective of the commodities merit or de-merit value. Unlike the nationalised industry where profit is low or non-existent, profits from private investors can be invested in future development and technology. Again all these benefits are assuming that material goods are an advancement for society.
In conclusion an economy with the benefits of privatised industry, providing the goods and services with a range of choice would appear more advantages to the economy and the consumer. Particularly if the government was to enforce controls and regulations on monopolies and oligopolies. Also ensuring that de-merit goods were unavailable or heavily taxed and merit and public goods were provided cheap or free at the point of consumption for use by all. A redistribution of income via the taxation system would also be beneficial to those lower classes that will continue to be exploited. Of course negative externalities should be eradicated wherever possible by way of government intervention.
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Bibliography
Anderton, A. (2000) Economics (third edition) Lancs: Causeway Press Ltd.
Edgemand, M. ed. (1996) Economics and Cotemporary Issues (third edition) London: Drydon Press
Smith, A. 1776. The Wealth of Nations http://www.fordham.edu/halsall/mod/adamsmith-summary.html
http://www.bized.ac.uk/stafsup/options/qbank/page17.htm
http://www.scotland.gov.uk/library3/economics/ser-12.asp
http://archive.treasury.gov.uk/budget/1997/report/fsbr.htm
http://www.isb.gov.uk/