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)
Questions
- What are the benefits of competition?
- What are the market failures within the healthcare market? To what extent do you think that public sector provision (in the form of the NHS) is the most effective type of intervention?
- Is this just the first step towards privatisation of healthcare?
- Do you think private ownership of hospitals with significant debts is a good strategy?
- Why do you think Unison have argued that Circle’s takeover is ‘an accident waiting to happen’?
- Does privatisation mean that profits will be more important than patient care?
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)
Questions
- What are the general benefits of competition?
- How does competition in the education market improve efficiency and hence exam results? Think about results in the private sector.
- What is the idea of a voucher scheme? How do you think it will affect the efficiency of the sector?
- What do you think would happen to equity in if a scheme such as the voucher programme was implemented in the UK?
- How do you think UK families would react to the introduction of a voucher scheme?
- What other policies have been implemented in the UK to create more competition in the education sector? To what extent have they been effective?
Nokia is finding out just how competitive the phone industry is, as it sees its third quarter figures come in at a loss. Google and Apple have seen their market shares rise and this has had an adverse effect on the Finnish company, Nokia. This goes some way to backing up the job losses seen earlier in the year, when 7000 jobs were cut and there was a re-allocation of workers towards ‘smartphones’.
Despite Nokia’s disappointing results in this sector, it has seen growth in its sales of other more simple phones, illustrating its ability to focus on this aspect of the market. Its sales were higher than forecast at 107 million handsets in the third quarter, showing some signs of a changing trend for the firm. However, with competition ever increasing, Nokia will need to consider its future strategy very carefully.
Nokia reports lower-than-estimated loss as profit forecast for phone unit Bloomberg, Diana Ben-Aaron (20/10/11)
Nokia swings to loss in third quarter BBC News (20/10/11)
Nokia boosted by sales of cheap handsets Financial Times, Daniel Thomas (20/10/11)
Nokia beats forecasts with sales of 107m phones Guardian, Juliette Garside and Charles Arthur (20/10/11)
Nokia prepares for ‘solid’ windows phone launch Telegraph, Matt Warman (25/10/11)
Questions
- How would you describe Nokia’s strategy of focusing on cheaper and simpler phones?
- Would you say Nokia’s strategy is sensible? What factors will determine its success?
- How have Apple and Google managed to expand their market share and become serious competitors to firms like Nokia?
- Into which market structure would you classify the phone industry?
We’ve had numerous examples in recent years of the economic turmoil that natural disasters can have and unfortunately, we have another to add to the list: the Japanese earthquake and tsunami. As Japan tries to take stock of the damage and loss of life, the economic consequences of this disaster will also need considering. The previous Kobe earthquake cost the economy an estimated 2% of GDP, but this did hit a key industrial area. The economic consequences of the 2011 earthquake were originally not thought to be as bad, but the economy will undoubtedly suffer.
The Japanese economy, like the UK, shrank in the final quarter of 2010, but was expected to return to growth. The devastation of the earthquake and tsunami is now likely to delay this economic recovery. Many car companies are based in Japan and are expected to take some of the biggest hits. Nomura analysts suggested that annual operating profits of companies such as Toyota, Nissan and Honda would be dented by between 3% and 8%. You only have to look at some of the footage of the disaster to see why this is expected. Supply chains will undoubtedly be disrupted, many of whom are located in the exclusion zone and financial markets across the world have fallen, as the possibility of a nuclear disaster threatens. As Louise Armistead writes:
‘By lunchtime in Britain £32bn had been knocked off the value of the FTSE-100 dropped, which fell by more than 3pc in early trading but recovered later to close down 1.38pc at 5,695.28. Germany’s DAX plunged 3.19pc, recovering from a 4.8pc fall, and France’s CAC ended the day 3.9pc lower, while on Wall Street, the Dow Jones Industrial Index dropped 2pc shortly after opening.’
A key question will be whether Japanese reconstruction will push the economy out of its deflationary spiral or make it even worse.
GDP measures the value of output produced within the domestic economy, but it is by no means an accurate measure of a country’s standard of living. Whilst it will take into account new construction that will be required to rebuild the economy, it doesn’t take into account the initial destruction of it. As output and growth are expected to fall in the immediate aftermath, we may see a boost to growth, as reconstruction begins.
The problem of scarcity is becoming more and more apparent to many survivors, as they begin to run short of basic necessities, which has led to various rationing mechanisms being introduced. Despite the devastating conditions which survivors now find themselves in, when supplies are delivered, the efficiency of Japan is still very evident. As noted by BBC Radio 4 coverage, as soon as the supplies arrived, a line was in place to unload the van in minutes. Teams have been set up to help everyone get through the tragedy. Even in the most devastating of times, Japanese efficiency still shines through and undoubtedly this will be a massive aid in the huge re-construction projects that we will see over the coming months and even years. Analysts say that there will be short term pain, but that the investment in construction will boost the economy later in the year.
Japanese earthquake: Markets shed £1trillion amid nuclear fears Telegraph, Louise Armistead (16/3/11)
Panic over Japan triggers market turmoil Independent, Nikhil Kumar (16/3/11)
Japan quake: Economy ‘to rebound’ after short term pain BBC News (14/3/11)
Japan disaster: The cost of a crisis Guardian (16/3/11)
Global stock markets tumble in ‘perfect storm’ amid fears of nuclear disaster Mail Online, Hugo Duncan (16/3/11)
Japan’s earthquake will cause a global financial aftershock Guardian, Peter Hadfield (15/3/11)
Economists’ estimate of Japan quake impact Reuters (16/3/11)
Fukishima factor adds pressure to economic fallout from Japan’s crisis Guardian, Larry Elliott (15/3/11)
Questions
- What is the likely impact on Japan’s GDP?
- Why is the potential disruption to the supply chain important for a firm?
- How and why will this catastrophe affect global financial markets?
- What are some of the main problems of using GDP as a measurement for growth? Think about the impact on GDP of Japan’s destruction and their future re-construction.
- What types of production methods etc have Japan implemented to allow them to become so efficient in production?
- What are the arguments to suggest that this disaster might help the Japanese economy recover from its deflationary spiral? What are the arguments to suggest that it might make it worse?
- What are some other examples of natural disasters or human errors that have also had economic consequences?
Reforms and budget cuts seem to be the norm across the world. In the UK, we’ve seen announcements about substantial cuts in government spending and reforms to our welfare state, including child benefit and pension reforms. But how will people react? Perhaps, we should look to France to see what could be to come. People across the country are protesting against the plan to raise the pension age from 60 to 62.
Workers at French oil refineries have ceased work and, as as a result, shortages of petrol across France look set to continue. There has been mass disruption to various transport markets, including cancelled flights and lorry drivers using ‘go-slow tactics’.
Furthermore, it’s not just workers at oil refineries who are on strike. Rubbish remains uncollected; oil tankers are floating off the coast; rail strikes and postal strikes have disrupted daily life; and even the school system has been affected. But, what are the costs of these strikes? Will the French economy suffer? Will economic growth be affected? It’s certainly an inefficient use of resources and will undoubtedly cost money.
Yet, despite these strikes, the President has said that the reforms will still go ahead, as he looks forward to a Senate vote on the pension bill. But what are the problems necessitating pension reform, not just in France, but across the world? And will it be France’s turn to experience a ‘winter of discontent’?
French strikes force petrol stations to shut BBC News (18/10/10)
Defiant Marseille, heart of France’s social unrest Reuters (18/10/10)
French Fuel Crisis: Protests turn violent Sky News, Huw Borland (18/10/10)
JPMorgan says French strike will cut demand for oil next year Bloomberg, Grant Smith (18/10/10)
French strikes hit airlines, trucking, gas pipes Philippine Star (19/10/10)
French riot police clash with students as petrol stations run dry Telegraph, Henry Samuel (18/10/10)
French based for another day of strike action Guardian, Angelique Chrisafis (18/10/10)
France strike: flights cancelled, airlines told to carry enough fuel for return journey Telegraph (18/10/10)
Questions
- What action other than striking is open to workers? What are the costs and benefits of each?
- Why are strikes by groups of workers likely to be more effective than protests by individual workers?
- Illustrate on a diagram the effect of a trade union entering an industry. How does it affect equilibrium wages and equilibrium employment? Is there any difference if the trade union faces a monopsonist employer of labour?
- What are the efficiency arguments against strike action?
- How are oil prices determined? What will be the impact on oil prices of these strikes in France? Will there be an impact on the rest of the world?
- What are the key issues necessitating pension reform? Are these issues worth the price of the strikes?