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.