Switching Off Street Lighting

by Michael Owen

Street lighting is often a favourite example of a public good cited by students and teachers in lessons on public goods. It is provided collectively by local government, as it is unlikely to be profitable for private suppliers. 
However, some local councils have decided to not use scarce grant or ratepayers’ funds to pay for street lighting, instead the lights will be turned off or dimmed. Given that there is no statutory requirement for the provision of street lights, the policy appears to highlight the economic problem of limited resources and unlimited wants as well as opportunity cost.

Street Lighting in Nottinghamshire
Nottinghamshire County Council proposes to switch off the lights between midnight and 5.30 in the morning. External benefits might include lower energy use, protection of nocturnal wildlife and their habitats and the creation of a clearer view of the galaxies, but these are offset by possible increases in external costs (accidents or crime). Placing a monetary value on such external costs and benefits of the proposed policy will depend on the assumptions used by the Council’s economists.

The current proposals to reduce state spending may hint at a rethink of what constitutes merit goods and public goods, and whether a partial market failure can be tolerated.

What is the theory of contestable markets?

As Chapter 9 explains, in recent years, much of the debate about the best way of dealing with the problems posed by monopoly has reflected the growing influence of contestable market theory. Before the advent of this theory (and of the wider free-market revival of which the theory of contestable markets is a part), competition policy was generally interventionist. Increased intervention was justified by the alleged need to countervail the growing power of large business organisations.

By contrast, contestable market theory is now used to justify a much less interventionist approach.The theory suggests that monopoly should be defined not by the number of firms in the market or by concentration ratios, but rather by the potential ease or difficulty with which new firms may enter the market. Actual competition in a market is not essential; the threat of entry by new firms (or potential competition) is quite enough to ensure efficient and non-exploitative behaviour by existing firms within the market.

For a market to be perfectly contestable, in the long run there must be zero costs of entry and exit and firms must be able to enter or leave it quickly. This means there must be no barriers to entry and no sunk costs. Sunk costs are costs that must be incurred to enter the market, but which cannot be recovered if the firm decides to leave the market. In these conditions, hit-and-run market activity is likely to occur. ‘Hit and run’ describes a situation in which a new firm enters or hits the market to see if normal profit can be made. If profit is insufficient, then given the absence of sunk cost, the firm leaves or runs from the market.

Outline possible approaches to the problem of monopoly.

Possible approaches that could be used to deal with the problems posed by monopoly include:

- compulsory breaking up of all monopolies (monopoly busting)
- use of price controls to restrict monopoly abuse
- taxing monopoly profits
- rate of return regulation
- nationalising or taking into public ownership previously privately-owned monopolies
- privatising previously state-owned monopolies
- removing barriers to entry and regulations that previously protected monopolies

Not all these possible approaches have been used by the UK competition policy authorities and some of the policies — notably nationalisation and privatisation — are the opposites of each other and could hardly be used at the same time. Questions in the Unit 3 examination paper may well ask for analysis and evaluation of policies the authorities might use.

It is extremely unlikely, however, that questions will ask for a history of UK policy or for a description of the roles of the Competition Commission and the OFT. Although the roles of the competition authorities have been described here, this should be treated as useful background knowledge, rather than as information for students to learn in depth.

Elements of Competition and Industrial Policy

There are three main elements of industrial policy:
- competition policy
- policy toward nationalised industries (including privatisation)
- regional policy

There are also three main elements to competition policy:
- monopoly policy
- merger policy
- trading restrictive practice policy

Define industrial policy

Industrial policy is the name used for the elements of government policy that aim to make industries,markets, and firms within the markets function better. Industrial policy is microeconomic rather than macroeconomic. From the 1950s until 1979, UK industrial policy was interventionist rather than antiinterventionist,reflecting the Keynesian and mixed-economy assumption that, left to themselves,markets are prone to market failure (see Chapter 10). The Keynesians believed that government intervention to subsidise and protect industries, particularly in the fields of research and development and regional location, generally made markets function better.

However, ever since the free-market revival in the 1970s, government intervention to prop up uncompetitive industries (often called ‘lame ducks’, ‘hospital cases’, ‘geriatric industries’ or ‘sunset industries’) has gone out of fashion. The free-market view is that business people, rather than civil servants, know best, and that, far from creating a level playing field for domestic firms to compete with foreign rivals, government aid to industry results in the waste of taxpayers’ money and government failure caused by picking losers rather than winners.

UK industrial policy is administered by the Department for Business, Enterprise and Regulatory Reform (BERR), until recently known as the Department of Trade and Industry (DTI). Over the years,and in response to the pro-free-market anti-interventionist view, the money spent on UK industrial policy by the BERR has fallen and is now only a very small part of total government spending.

Immediately after the 2005 general election, a rather odd sequence of events occurred. In its third term of office, the New Labour government decided the DTI (as it was then called) needed rebranding as the Department of Productivity, Energy and Industry (DPEI). However, this name lasted only a few days. The government realised it would be difficult to justify spending hundreds of thousands of pounds renaming government buildings and reprinting office stationery. However, this unfortunate experience did not prevent the department being rebranded as the BERR in June 2007.

Assessment for Learning

Readers (if you are not playing COD BO) the issue of the moment is how to best answer the questions on the exam paper.

Sounds obvious, but having marked many many exam papers in my time, I know you don't do it as well as you think you do.

One way to make these expectations clearer is to plan opportunities for Peer and Self-assessment. The student has the chance to develop the skills assess the work of others, and then their own.

This week in both Y12 and Y13 we used a "Visualiser" to one person's piece of work a they wrote an essay. (Thanks Joe and James).

We looked critically at this piece of work and other pupils, doing the same piece marked the piece and also considered how their work compared and by extension, how they could improve both pieces.

What was pleasing was that no one, in either group, expected me to take in the work to mark!

NB
A Visualisers is a device to project a hard copy piece of work projector onto a writeboard.