Skip to content

IAI Actuarial Core Principles · Business Economics · Supply-side policies and their impact on businesses

Privatisation of a state-owned telecom utility is followed by the entry of private competitors. Which is the most likely effect on the incumbent firm's behaviour?

Privatisation combined with new competition gives the incumbent a profit motive and removes protection from inefficiency. It therefore has a stronger incentive to cut costs, improve service and innovate, which is the intended supply-side efficiency gain.

  1. AReduced pressure to control costs since profits now go to shareholders
  2. BStronger incentive to cut costs and improve service because of profit motive and competitionCorrect
  3. CNo change in behaviour because ownership does not affect incentives
  4. DHigher prices guaranteed by the removal of regulation
  5. A fall in investment because private firms cannot raise capital

Explanation

Private ownership brings a profit motive and shareholder scrutiny, and competition removes protection from inefficiency. Together these push the firm to cut costs and improve service quality. Higher guaranteed prices would not follow from competition.

Did you get it right without looking?

One question tells you little. A timed set on Supply-side policies and their impact on businesses shows your real accuracy, how long you take and where you lose marks.

Practise Supply-side policies and their impact on businessesFree diagnostic mock

More Supply-side policies and their impact on businesses questions