Question & Answer

In 1974 the UK economy shrank by 2.5 per cent before shrinking by a further 1.5 per cent in 1975. However, GDP measured in the prices of the time rose by 13 per cent in 1974 and by 24 per cent in 1975. What explains these apparently contradictory results?

Price-cap regulation was abandoned in the gas and electricity industries because the regulator (Ofgem) felt that there was sufficient competition. Consider whether this was a wise decision.

If price regulation results in lower profits, will this always imply lower investment? How might a government incentivise innovation in a regulated industry?

Examine the case for public ownership of an industry where a natural monopoly exists.

If an industry regulator adopts an RPI – X formula for price regulation, is it desirable that the value of X should be adjusted as soon as cost conditions change?

Summarise the relative benefits to consumers of (a) privatising a nationalised industry; (b) keeping it in the public sector but introducing competition.

Should regulators of utilities that have been privatised into several separate companies allow (a) horizontal mergers (within the industry); (b) vertical mergers; (c) mergers with firms in other industries?

There exists a view that the UK is too small an economy to benefit from competition in many industries, with firms failing to reach minimum efficient scale. What does this imply for competition policy?

If two or more firms are charging similar prices, does this imply that collusion is taking place? What evidence would you need to determine the existence of collusion?

Consider the argument that whether an industry is in the public sector or private sector has far less bearing on its performance than the degree of competition it faces.

Compare the relative merits of banning certain types of market structure with banning certain types of market behaviour.

Should governments or regulators always attempt to eliminate the supernormal profits of monopolists/ oligopolists?

In 2010 the number of air passengers using UK airports fell by 3.4 per cent compared with 2009. In 2015, passengers were 5.5 per cent up compared with 2014. Can we deduce anything about people’s attitude to the environment and their behaviour from these data?

Since 2008, the UK government has provided free off-peak bus travel for the over-60s in England and Wales. What do you think the impact of this policy has been on car usage? Is there a case for extending the policy to (a) bus travel for pensioners at all times of the day, as is the case in Scotland (b) bus travel for all?

Many London councils now have residents’ street parking permits, with charges that vary according to the carbon emissions of the registered vehicle. Explain the thinking behind this policy.

How would you set about measuring the external costs of road transport?

Why is the price inelasticity of demand for private car transport a problem when formulating a policy for the reduction of traffic congestion? What could be done to change the price elasticity of demand in a desirable direction?

Compare the relative merits of increased road fuel taxes, electronic road pricing and tolls as means of reducing urban traffic congestion.

Make out a case for adopting a policy of individual tradable carbon permits, allocated to all citizens within a country. Could such a policy be extended globally?

In 2007 China overtook the USA as the world’s largest emitter of CO₂. Yet USA per capita emissions are three times that of China. What issues arise from this in the formulation of a global policy to reduce CO₂ emissions?

Why might efforts to address the issue of global warming be hampered by a lack of understanding of probability amongst the general public?

Make out a case from a deep green perspective for rejecting the ‘social efficiency’ approach to the environment.

Assume that there are several chemical firms in an industry, each one producing different levels of an effluent, whose damage to the environment depends on the location of the firm. Compare the relative merits of using green taxes, tradable permits and controls as means of achieving the socially optimum levels of effluent from these firms.

Assume that as traffic density increases along a given stretch of road, there comes a point when traffic begins to slow down. The following table gives the times taken for a car to travel the stretch of road (in minutes) according to the number of cars entering the road per minute.

(a)  Copy out the table and add the following rows: (i) total journey time for all cars; (ii) extra journey time as traffic increases by one more car (marginal social time cost); (iii) additional time cost imposed on other road users for each additional car entering the road (marginal external time cost). (See Table 13.3 in the text.)

(b)  Assume that time is valued at 10p per minute. On a graph, plot the marginal private time cost (journey time) and the marginal social time cost.

(c)  Assume that electronic road pricing is introduced. What charge should be levied when traffic density reaches (i) 6 cars per minute; (ii) 8 cars per minute; (iii) 11 cars per minute?

(d)  What additional information would you need in order to work out the socially efficient traffic density on this particular stretch of road?

Make out a case for (a) increasing and (b) decreasing the role of the government in the allocation of resources.