When is competition a bad thing?

Over the years, various aspects of the UK economy have been privatised - taken out of the hands of the government, and their operations have been handed to private operators. The widespread perception of this is negative - it leads to higher prices and poorer service. Yet economists are unremittingly positive about competition - which kind of requires privatisation since if a government is the only provider of a service, by definition there's no competition. Why the contradiction?

One area in which it's generally perceived competition has been bad is in education - to be specific, in examining bodies, the companies that set exam papers at GCSE (and A-) level. Today apparently the government will announce an overhaul of this system. Apparently there's been a "race to the bottom" with having exam bodies competing with each other, and this should thus be changed, and the resulting system will have just one body providing exams - removing competition.

But why has competition between examining bodies led to this supposed race to the bottom, and reduction in standards that everyone believes has happened? What is distinct about the market for exams (particularly at GCSE - it seems A-levels are less susceptible to this criticism) that means competition is not helpful? Why do exam providers feel they have to make exams easier and easier, and provide greater proportions of A-Cs in order to look good?

What is acting in the market to prevent firms competing on how well their exams assess the ability levels of students (essentially the purpose of examinations)? Are there restrictions on new entrants to the market? Given the current climate, it strikes me if new bodies could set up to provide exams, a body that set up proposing to provide not the highest possible proportion of A-Cs but the most accurate assessments of students, that would be popular, at least amongst the popular press? I suspect there are many regulatory hurdles a new entrant would have to jump through - get certified by many bodies, checked over by other regulatory entities and so on. I doubt it's particularly easy to set up.

My sense is the race to the bottom is not caused by competition amongst exam bodies, but more the clamour of schools to be able to show an ever increasing percentage of A-C GCSEs, meaning that they want the exam bodies that provides them with that. And is that clamour just because of competition - competition to attract the best students?

Fundamentally, is there something wrong with competition in education? Again, I wonder whether this need actually be the case. Can new schools open up to provide a better service than the current lot? The answer is starting to change here - free schools are an example of this. Fundamentally, markets work because they provide incentives to others to provide a better service, and clearly if a school sets up and provides a high standard of education that employers (and society at large - schools needn't just be worker producers) values, then in a marketplace it would attract custom.

Now as I finish, of course there are difficulties with markets in education - information is a tricky thing and the consumer (the student) isn't necessarily fully informed about the value of what they are consuming. Nonetheless, that doesn't mean that competition won't work. Nor does examples of failed "competition" measures that have existed over the years. As a student of economics, it's important you realise that such examples are merely observations, and rather distorted ones for the reasons outlined in this post.

Summer activity

It's summer and although not formally term time, I tend to keep posting on here regardless with hopefully interesting stuff in case former students are still tuning in, so to speak.

Of interest yesterday, alongside the injustice handed out to Ukraine by human error (and some economics - why did UEFA really think adding more scope for human error was better than goal line technology?), was inflation falling to 2.8%, its lowest level for quite a while. Importantly, firmly back within the target range.

How is that possible, given all this quantitative easing and continued budget deficits? You'll recall the former adds liquid assets to the economy in place of illiquid ones hence should see more spending. The latter also adds more money into the economy by putting unearned money in the hands of unemployed people and such, and via spending projects for example related to the Olympics.

The answer is that this extra money, for now, isn't being spent. You'll also recall the aggregate demand (AD) aggregate supply explanation for price level determination and hence inflation. If AD stays in the same place since we don't spend then we won't get inflation despite supposedly inflationary policies.

End of term - congratulations or otherwise...

Today is the last day of the academic year here in Birmingham - results day.  Well done to all of those that got the results they were hoping for, commiserations to those who didn't.

Hope to see those of you continuing students next year, and to those leaving us, all the best in the future - do keep in touch!

Eurozone Madness

The news seems ever ongoing and ever worsening from the eurozone, and perhaps more than any other subject area at the moment, attracts comments that are disingenuous - folk that are anti-EU make suggestions that they know will lead to only one thing - the break up of the eurozone and maybe even the EU.

One common suggestion is that Greece should leave the euro, and many suggest Greece would even be better off if it did.

Such statements are very simplistic readings of the situation, and I wonder if they are deliberately so because the people making them are ideologically predisposed against the euro.

Allowing countries to leave the euro would signal the end of the euro because of the precedent it would set - that countries can be forced out. When would it stop? Would even France be safe? The eurozone functioned pre-crisis very well because it was seen to be irrevocable, and credibly so. That meant an absence of speculation, something that has returned en masse now that the crisis has arrived.

Second, would Greece be better off outside? Its debt would be transferred into its new currency which would immediately depreciate, increasing the size of its debts significantly. That isn't going to help solve its problems any time soon...