Question Details

ETMA 03 02 MARKET MECHANISM 
 Question  
I have few qualms about celebrating the creativity of capitalism and capitalists. It may not be pretty but, on the whole, greed is good. Organizations that operate in a competitive marketplace and where success is closely correlated with financial rewards tend to be more efficient and usually serve the public interest better than those run by the public sector by bureaucrats with more amorphous goals. Who in the UK can honestly argue that our competitive telecoms market - which has engendered both massive deflation in the price of services and tremendous innovation - is inferior to the pre-privatization world of British Telecommunications as a state-owned, arrogant, monolithic monopolist? Is it likely that the broadband internet would not be as widely available as it is, and at such low prices, if entrepreneurs like Charles Dunstone at Carphone Warehouse or James Murdoch at British Sky Broadcasting were not endeavouring to make fortunes for themselves and their businesses by connecting up as many homes as they can in record time? 
(Peston, 2008, pages 336-7). 
Reference 
Peston, R. (2008) ‘Who runs Britain? And who- to blame for the economic mess we’re in?’ London: Hodder & Stoughton. 

Required: 
(a) Explain the market mechanisms behind the competitive telecoms market in the UK that Robert Peston is praising in terms of the benefits both to consumers and to the entrepreneurs concerned. (Your answer should cover both how the market mechanisms work in a competitive market as well as the individual and public benefits of such a mechanism.) 
(10 marks) 

(b) Critically discuss situations in which the operation of free markets does not lead to optimal outcomes. 
(5 marks) 

(c) What alternative market mechanisms would you advocate to remedy the situations you have identified in (b) above? What would be the benefits of your suggested alternative market mechanisms? 
(5 marks) (Total 20 marks)


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