In the UK, we have a dominant public healthcare sector and a small private sector. In the blog Is an education monopoly efficient? we looked at the idea of an education monopoly and why that may create inefficiencies in the system in comparison with competitive private markets. Does the same argument hold for the market for healthcare? The NHS is largely a state monopoly, although market forces are used in certain areas, which does bring some benefits of competition. However, was the NHS to be privatized, would we see further efficiency gains? As we stated in the previously mentioned blog: ‘the more competition there is, the more of an incentive firms have to provide consumers with the best deal, in terms of quality, efficiency and hence price.’

Privatisation of the NHS has always been regarded with skepticism – of all the British welfare state institutions, the NHS is the most symbolic. However, we have recently seen a takeover of a NHS hospital by a private firm. It’s not privatisation, but it is a step towards a more privately run healthcare system.

Hinchingbrooke hospital in Cambridge is only small, but has a history of large debts – £40m and yet only a turnover of about £105m. This new strategy will still see the NHS owning the hospitals, but the private firm becoming liable for the hospital’s debts and essentially taking over the running of it. However, Circle aims to repay all the debts within 10 years and make a profit. There are many skeptics of this bold new approach, suggesting that Circle’s numbers don’t add up, especially with the flat NHS spending we’re going to see. However, the firm does have a positive track record in terms of making efficiency savings and whilst success will undoubtedly be a good thing – it may bring up some pertinent questions for the way in which the NHS is and should be run.

Hinchingbrooke hospital deal shakes up NHS Financial Times, Nicholas Timmins (10/11/11)
Failing NHS hospital is taken over by private firm for the first time in history Mail Online, Jenny Hope (11/11/11)
Andrew Lansley’s NHS is all about private sector hype Guardian, John Lister (11/11/11)
Circle clinches hospital management deal Reuters, Tim Castle (11/11/11)
Will profits come before patients in a hospital run by a private company? Independent, Oliver Wright (11/11/11)
Hospital group’s liabilities capped at £7m Financial Times, Sarah Neville and Gill Plimmer (10/11/11)
First privately run NHS hospital ‘is accident waiting to happen’ Guardian, Randeep Ramesh (10/11/11)
Government rejects hospital privatisation claims BBC News, Democracy Live (10/11/11)

There has always been relatively widespread agreement that the best method to produce and finance education is via the government. Education is such a key service, with huge positive externalities, but information is far from perfect. If left to the individual, many would perhaps choose not to send their children to school. Whether it be because they lack the necessary information, they don’t value education or they need the money their child could earn by going out to work – perhaps they put the welfare of the whole family unit above the welfare of one child. However, with such large external benefits, the government intervenes by making education compulsory and goes a step further in many countries and provides and finances it too.

However, is this the right way to provide education? People like choice and the ability to exercise their consumer sovereignty. The more competition there is, the more of an incentive firms have to provide consumers with the best deal, in terms of quality, efficiency and hence price. We see this every day when we buy most goods. Many car salesrooms to visit – all the dealerships trying to offer us a better deal. Innovation in all industries – one phone is developed, only to be trumped by a slightly better one. This is only one of the many benefits of competition. Yet, education sectors are largely monopolies, run by the government. Many countries have a small private sector and there is substantial evidence to suggest that education standards in it are significantly higher. Research from Harvard University academics, covering 220,000 teenagers, suggests that competition from private schools improves achievement for all students. Martin West said:

“The more competition the state schools face for students, the stronger their incentive to perform at high levels…Our results suggest that students in state-run schools profit nearly as much from increased private school competition as do a nation’s students as a whole.”

The study concluded that an increase in the percentage of private school pupils made the education system more competitive and therefore more efficient, with an overall improvement in education standards. With so much evidence in favour of competition in other markets in addition to the above study, what makes education so different?

Or is it different? Should there be more competition in this sector – many economists, including Milton Friedman, say yes. He proposed a voucher scheme, whereby parents were given a voucher to cover the cost of sending their child to school. However, the parents could decide which school they sent their child to – a private one or a state run school. This meant that schools were in direct competition with each other to attract parents, their children and hence their money. Voucher schemes have been trialed in several places, most prominently in Sweden, where the independent sector has significantly expanded and results have improved. Is this a good policy? Should it be expanded and implemented in countries such as the UK and US? The following articles consider this.

Articles
School Competition rescues kids: the government’s virtual monopoly over K-12 education has failed Hawaii Reporter, John Stossel (30/10/11)
Private schools boosts national exam results Guardian, Jessica Shepherd (15/9/10)
Can the private sector play a helpful role in education? Osiris (10/8/11)
Voucher critics are misleading the public Tribune Review, TribLive, Joy Pullmann (30/10/11)
Vouchers beat status quo The Times Tribune (29/10/11)
Why are we allowing kids to be held hostage by a government monopoly? Fox News, John Stossel (26/10/11)
Free Schools – freedom to privatise education The Socialist (26/10/11)
Anyone noticed the Tories are ‘nationalising’ schools? Guardian, Mike Baker (17/10/11)

Publications
School Choice works: The case of Sweden Milton & Rose D Friedman Foundation, Frederick Bergstrom and Mikael Sandstrom (December 2002)

Economics studies the choices people make. ‘Rational choice’ involves the weighing up of costs and benefits and trying to maximise the surplus of benefits over costs. This surplus will be maximised when people do more of things where the marginal benefit exceeds the marginal cost and less of things where the marginal cost exceeds the marginal benefit. But, of course, measuring benefits and costs is not always easy. Nevertheless, for much of the time we do make conscious choices where we consider that choosing to do something is ‘worth it’: i.e. that the benefit to us exceeds the cost.

When we make a choice, often this involves expenditure. For example, when we choose to buy an item in a shop, we spend money on the item, and also, perhaps, spend money on transport to get us to the shop. But the full opportunity cost includes not only the money we spend, but also the best alternative activity sacrificed while we are out shopping.

Then there are the benefits. Not all pleasurable activity costs us money. The sight of beautiful contryside or the pleasure of the company of friends may cost us very little, if anything, in money terms. But they may still be very valuable to us.

If we are to make optimal decisions we need to have some estimate of all costs and benefits, not just ones involving the payment or receipt of money. This applies both to individual behaviour and to collective decisions made by governments or other agencies.

Cost–benefit analysis seeks to do this to help decisions about new projects, such as a new road, a new hospital, environmental projects, and so on. But just how do we set about putting a value on the environment – on the pleasure of a walk in bluebell woods, on protecting bird life in wetlands or sustaining ecosystems?

For the first time there has been a major study that attempts to value the environment. According to the introduction to the report:

The UK National Ecosystem Assessment (UK NEA) is the first analysis of the UK’s natural environment in terms of the benefits it provides to society and the nation’s continuing prosperity. Carried out between mid-2009 and mid-2011, the UK NEA has been a wide-ranging, multi-stakeholder, cross-disciplinary process, designed to provide a comprehensive picture of past, present and possible future trends in ecosystem services and their values; it is underpinned by the best available evidence and the most up-to-date conceptual thinking and analytical tools. The UK NEA is innovative in scale, scope and methodology, and has involved more than 500 natural scientists, economists, social scientists and other stakeholders from government, academic and private sector institutions, and non-governmental organisations (NGOs).

The following podcast and webcast look at the report and at some of the issues it raises in terms of quantifying and incorporating environmental costs and benefits into decision taking.

Podcast and Webcast
‘The hidden value’ of our green spaces BBC Today Programme, Tom Feilden (2/6/11)
Report puts monetary value on Britain’s natural assets BBC News, Jeremy Cooke (2/6/11)

Articles
NEA report highlights need for biodiversity Farmers Guardian, Ben Briggs (2/6/11)
Nature is worth £19bn a year to the UK economy – report Energy & Environmental Management Magazine (2/6/11)
In praise of… the unquantifiable Guardian (3/6/11)
Priceless benefits of bluebell woods Guardian letters, Dr Bhaskar Vira and Professor Roy Haines-Young (4/6/11)
Nature ‘is worth billions’ to UK BBC News, Richard Black (2/6/11)
Putting a price on nature BBC News, Tom Feilden (2/6/11)
Value of Britain’s trees and waterways calculated in ‘ground-breaking’ study The Telegraph, Andy Bloxham (2/6/11)
Nature worth billions, says environment audit Financial Times, Clive Cookson (2/6/11)
Nature gives UK free services worth billions Planet Earth, Tom Marshall (3/6/11)
UK scientists put price on nature with National Ecosystem Assessment GreenWise, Ann Elise Taylor (2/6/11)

Report
UK National Ecosystem Assessment: link to report DEFRA
UK National Ecosystem Assessment (June 2011)
The UK National Ecosystem Assessment: Synthesis of the Key Findings

The benefits of competition are well documented. Efficiency incentives, increased choice and lower prices for consumers. During the recession, consumers became increasingly price sensitive, as incomes were squeezed and retailers responded with advertising campaigns focused on price. However, along with the recession came a sector unwilling to lend: banks. However, as the economy recovers, we’re seeing a return to fierce competition by credit card companies, who are extending the time that consumers can benefit from 0% interest balance transfer deals. An incentive for consumers to switch their credit card debt from one company to another is the lack of interest for a given period of time, and as competition intensifies, some of the biggest companies are extending the length of 0% interest. Kevin Mountford, from Moneysupermaket said:

“This competition is welcome news for those consumers who are in a position to take advantage of this price war and consolidate any existing credit card balances on to cheaper deals.”

However, the people most likely to benefit are those with the best credit rating and even then, there are likely to be catches held in the small print. So, just how beneficial is this return to competition by credit card companies – does it benefit consumers or are we just going to see a return to crisis, if more people take on increasing debt?

Barclaycard hits back in credit card war Telegraph, Teresa Hunter (17/3/11)
Credit card competition hots up on 0% deals BBC News (17/3/11)
The best credit card deals EVER Moneysupermarket.com, Felicity Hannah (17/3/11)
MBNA credit card to offer 0% on balance transfers for 18 months Guardian, Gill Insley (17/3/11)
Barclaycard deal ‘best ever seen’ The Press Association (17/3/11)
Best-buy cash back credit card launched Financial Times, Steve Lodge (16/3/11)

If you want to buy a newly released DVD, a cheaper option than buying off the high-street tends to be to buy online, in particular through Amazon, the world’s largest online retailer. However, Amazon has been facing increasing competition from another US giant, Netflix that has over 16 million subscribers and is looking at entering the British market. Arguably, in a response to this threat, Amazon has agreed to purchase Lovefilm, the online movie rental service that has grown rapidly over the past few years, with over 1.4 million members around the UK.

As of 2008, Amazon already had a 42% stake in the business, but as Lovefilm has been running into difficulties, their senior management team has been looking at the possibility of selling the remaining 58% share. Enter Amazon in a bid to cement and defend their place in the British market to companies such as Netflix. Below are a few articles concerning this takeover – more will be added, as further details emerge.

Amazon acquires Lovefilm for £200m Financial Times, Tim Bradshaw (20/1/11)
Can Lovefilm survive the streaming revolution? Telegraph, James Hurley (27/1/11)
Amazon takes full control of Lovefilm Guardian, Josh Halliday(20/1/11)
Amazon buys remaining stake in Lovefilm DVD service BBC News (20/1/11)
Amazon takes control of Lovefilm Broadband TV News, Julian Clover (20/1/11)
Amazon acquires Lovefilm, the Netflix of Europe Tech Crunch, Mike Butcher (20/1/11)

The market for food in the UK is highly competitive. From dining in style to a simple take-away, one of the key words when it comes to dining seems to be choice. Competitive prices and high quality are on offer, which is largely due to the sheer number of restaurants available to consumers. However, consolidation seems to be on the menu.

Nando’s is a well known restaurant and a popular eating destination on UK and Irish high streets, with more than 230 restaurants. This chicken restaurant group has made a £30 million bid for Clapham House, the company behind the Gourmet Burger Kitchen chain with 53 branches. Clapham’s shareholders were advised to accept the deal and on the 17th September 2010, it is reported that a deal was reached with Nando’s Group Holdings and its private equity owner Capricorn Ventures International. The 74 pence per share deal was met with disappointment by some analysts, who felt that the company was under-valued, despite failed attempts by Clapham House’s Board to persuade Capricorn to raise the offer price or find an alternative bidder.

The restaurant industry has suffered from the recession and especially by the weak economic recovery, so perhaps lower valuations are to be expected. Nando’s said:

‘As macroeconomic weakness has persisted in the UK, the trading environment for restaurant businesses in the UK has been difficult. This is evidenced by Clapham House’s vaolatile weekly trading performance.’

Nando’s intend to invest significantly in Clapham Houses’ businesses to reinvigorate their previous competitor. This may be essential, given the expectation that conditions in the UK will remain fragile, with consumer confidence staying low, as well as a somewhat untimely rise in VAT in January next year, which is almost certain to have an adverse effect on the restaurant business.

This take-over deal is not the first in the restaurant industry and nor is it likely to be the last, as the UK economy remains in a vulnerable state. The following articles look at this and over takeovers.

Nando’s to buy Gourmet Burger Kitchen for £30m BBC News (17/9/10)
UK restaurants serve up £50m in takeover deals Management Today, Emma Haslett (17/9/10)
Nando’s swallows Gourmet Burger Daily Mirror News, Clinton Manning (18/9/10)
GBK team plots next move after Nandos deal Telegraph, Jonathan Sibun (18/9/10)
Nando’s to buy Real Greek chain for £30m Independent, Alistair Dawber (18/9/10)
Mithcells & Butlers and Nando’s to feast on rival restaurant chains Mail Online, Ben Laurance (17/9/10)
GBK owner Clapham agrees to Nando’s offer Reuters (17/9/10)

If we are faced with simple and limited choices, we may make careful decisions based on a number of criteria: in other words, we will identify various characterisitics we are looking for and see how well the various alternative products or activities meet our criteria. When we have lots of choice, however, we may be less careful or get confused.

In this Guardian podcast, the panelists discuss complex choices between many products and/or characteristics. Are people being ‘rational’ when making such choices? Is being less careful simply a rational use of scarce time? Do people really want lots of choice or would they prefer more limited choice? Can experiments where people are given choices help us to understand how people choose and how much choice businesses or government should give people? Then there is the question of producers/suppliers of products. Does choice promote competition and product development and is there an optimum amount of choice to achieve this?

The Business: Choice Guardian Podcasts, Sheena Iyengar, Julian Glover and Andrew Lilico in conversation with Aditya Chakrabortty (1/9/10)

When we examine industries and markets in economics, one of the key things we look for is how competitive the market is. A question that we ask is, under what type of market structure is this firm operating? To answer this, we will need information on the number of competitors, the products, prices, advertising, profits, efficiency and how the firms are likely to behave in both the short and long run.

A lot of the time firms are independent: their behaviour doesn’t affect the actions of rivals. This is usually because each firm within the industry only has a relatively small market share. If one firm changes the price, or how much it spends on advertising/product development, this won’t have an impact on the market equilibrium.

However, it’s not as easy for an oligopolist, as interdependence is a key characteristic of this market structure. As such, it’s not surprising that firms have a decision to make: should they compete with the other firms and try to maximise our own profits, or should they collude and try to maximise industry profits? Whilst collusion is illegal in many countries, activities such as price fixing do go ahead and it can be difficult to prove, as the ACCC is finding with a petrol price-fixing case in Melbourne. In 49 of the 53 weeks studied, when one of the big petrol stations changed their price, the industry followed these movements exactly.

As competition in a market decreases, it could be a sign that an oligopoly is developing. A few firms are beginning to dominate the market and this could spell trouble for customers. Indeed, in the Australian banking sector, there are concerns that an oligopoly will develop if more competition is not introduced. The Deputy Chairman of the Australian Bankers’ Association said: “We’ve got four major banks that are repricing all their commercial and small business customers’ margins upwards”. Customers may therefore lose out with higher prices and less choice, while the dominant firms see their profits growing.

The market structure under which a firm is operating will have a major impact on its decisions and the outcomes in the market, as shown in the articles below.

ACCC on safe political ground in targeting the Mobil takeover The Australian Business, John Durie and Martin Collins (3/12/09)
Nippon Steel Chairman warns of Australian oligopolies Market Watch, Stephen Bell (10/11/09)
Government’s bank guarantee hurting BOQ: Libby Business Day (2/12/09)
Regulators to scrutinise BHP and Rio’s Australian joint venture Financial Times, William McNamara and Elizabeth Fry (7/12/09)
Crackdown on price fixing draws mixed reaction The Korea Herald (7/12/09)

The National Institute for Health and Clinical Excellence (NICE) is the independent agency in the UK charged, amongst other things, with assessing the cost-effectiveness of new drugs. In a report published on 19 November 2009, NICE found that the drug sorafenib, branded as Nexavar by its manufacturer, the German pharmaceutical company, Bayer AG, was not cost-effective. The drug can extend the life of terminally ill patients with liver cancer. However, it is very expensive, costing about £3000 per month per patient.

The NICE press release (see link below) quotes Andrew Dillon, the Chief Executive of NICE, as saying: “We were disappointed not to have been able to recommend the use of sorafenib, but after carefully considering all the evidence, including the proposed ‘patient access scheme’ in which the manufacturer offered to provide every fourth pack free, sorafenib does not provide enough benefit to patients to justify its high cost.”

Not surprisingly people suffering from liver cancer, and also various patient groups, were highly critical of the decision. But with a limited budget for the National Health Service and the increasing pressure to save costs in order to reduce the public-sector debt, many difficult choices like this have to be made.

What NICE attempts to do is a cost–benefit analysis of new drugs. Whilst costs can be difficult to measure, especially over the longer term, the benefits are much more problematic as they have to take into account the effects on the quality of people’s lives – something that will vary enormously from one patient to another. And then there are the effects on family and friends and on the economy. The measure used in the NHS and elswhere is the QALY – ‘quality-adjusted life year’. In paragraph 4.8 of the full NICE report (see link below), it was noted that

“the base-case ICER [incremental cost-effectiveness ratio] presented by the manufacturer was originally £64,800 per QALY gained and when the patient access scheme was included [where every fourth pack is supplied free to the NHS by Bayer] this went down to £51,900 per QALY gained. Both ICERs were substantially higher than those normally considered to be an acceptable use of NHS resources.”

2009/069 NICE appraisal of sorafenib for advanced hepatocellular carcinoma NICE press release (19/11/09)
Final appraisal determination Sorafenib for the treatment of advanced hepatocellular carcinoma (Full document) NICE (19/11/09)
NHS denies drug to cancer patients (video) ITN (on YouTube) (18/11/09)
Liver cancer drug ‘too expensive’ (including videos) BBC News (19/11/09)
UK’s NICE says Bayer liver cancer drug too costly Reuters (18/11/09)
Nice’s decision not to approve the liver cancer drug Nexavar is painful but necessary and Drug for terminal liver cancer patients ‘too expensive’Telegraph, Rebecca Smith (19/11/09)
NHS says it’s too expensive to keep you alive Telegraph, Janet Daley (19/11/09)
Bayer’s patent case hearing in HC today Tines of India (18/11/09)

According to Sir Liam Donaldson, England’s Chief Medical Officer, swine flu is on its way back. However, vaccinations are now available to the most vulnerable people, including front-line medical staff, people with chronic health problems and pregnant women. But, what about every-day workers? Surely, these are people that need protecting too, as they are the ones who contribute to the economy. How do you prioritise?

A key question is how much swine flu has actually cost the UK economy. Here, we’re not just concerned with the cost of the vaccines, but also the opportunity cost of that money, the lost output from illness, the human suffering – both of the victims and of their relatives and friends – and, of course, the impact on business and the economy. Some of the countries worst hit by the outbreak of swine flu have faced particular problems, such as protectionist trade policies and a significant fall in business through tourism.

So, will the vaccine prove cost effective for the government, or is it more about the moral obligation to provide it? These articles look at some of the recent developments in the worst pandemic in years.

Mexico economy squeezed by swine flu BBC News (30/4/09)
Swine flu vaccine on its way to GPs Grimsby Telegraph (21/10/09)
Exclusive – WTO protectionism report to feature swine flu bans Reuters (12/6/09)
Flu bill ‘may hit fire plans’ Teletext (27/10/09)
Swine flu vaccination under way BBC News (21/10/09)
Swine flu costs have put dent in profits, Amerigroup says Pilot Online, Tom Shean (27/10/09)
Swine flu gives Pharmaceutical Companies a New Edge Top News, Tangaroa Snell (26/10/09)
Economic cost of swine flu could be around $3 trillion to $4.4 trillion Today’s Zaman (Turkey) (2/11/09)
Swine flu mass vaccination programme launched Guardian (21/10/09)
Full list of swine flu cases, country by country Guardian (updated daily)
Doctors plan mass swine flu jabs for under-18s Times Online (1/11/09)