3.6 Government intervention

Question 1

Competitive tendering

Answer 1

Introducing competition among private sector firms which put in bids for work which has been contracted out by the public sector

Question 2

Contracting out

Answer 2

Getting private sector firms to produce the goods and services which are then provided by the state for its citizens

Question 3

Deregulation

Answer 3

The process of removing government controls from markets

Question 4

Regulatory capture

Answer 4

An example of government failure, it occurs when firms in an industry are able to influence to their advantage a regulatory body which is supposed to be regulating the behaviour of those firms

Question 5

Nationalisation

Answer 5

The transfer of firms or assets from private sector ownership to state ownership

Question 6

Privatisation

Answer 6

The transfer of organisations or assets from state ownership to private sector ownership

Question 7

Government intervention to control monopolies

Answer 7

Price-capping regulation - price controls imposed by the government
RPI minus X% - the reduction in price required as a result of expected efficiency improvements
RPI plus K% - firms raise prices ahead of RPI inflation, enabling additional investment
Profit controls - the firm is not permitted to earn more than a certain profit level - comes down to covering operating costs and then adding on a rate of profit - however, there may be regulatory capture, asymmetric information + monopoly may not bother to maximise efficiency
Quality standards - the government can try to enforce minimum standards
Performance targets - the regulator ma set a normal rate of return on capital employed - the marginal rate of tax above this acceptable rate is 100% - leaves no incentive to maximise efficiency to increase profit

Question 8

Example of price capping regulation

Answer 8

From 1st January 2019, OFGEM set the maximum amount that a person who uses an average amount of gas and electricity £1,137 per year

Question 9

Example of quality standards

Answer 9

Royal Mail legally obliged to deliver six days a week

Question 10

Government intervention to promote competition + contestability

Answer 10

Deregulation
Competitive tendering

Question 11

Advantages of competitive tendering

Answer 11

Promotes competition
Provides transparency - provides all suppliers the opportunity to win business

Question 12

Disadvantages of competitive tendering

Answer 12

Use of cheaper, poor quality materials + labour
Safety shortcuts
Can be extremely slow - can take a long time to choose a successful bidder
Insufficient profit margin to allow for investment

Question 13

Example of privatisation

Answer 13

Royal Mail (2013)

Question 14

Advantages of privatisation

Answer 14

Opens up markets to market forces - more efficiency due to more competition - state ownership confers property ownership on shareholders
Furthers the aim of a property owning democracy
Improves government finances

Question 15

Disadvantages of privatisation

Answer 15

Natural monopolies transferred - potential duplication of pipelines etc seems wasteful
Inequalities - tended to favour people who are better off, widening inequalities of wealth/income
Externalities - eg positive effects on BOP unemployment etc may be reduced

Question 16

Substantial lessening of competition factors

Answer 16

Competitors are restricted from competing effectively
The firm is able significantly and sustainably to increase its prices
It would be very hard for a new business to set up and start competing

Question 17

CMA objective

Answer 17

It works to promote competition for the benefit of consumers, both within and outside the UK, aiming to make markets work well for consumers, businesses and the economy

Question 18

Regulator roles

Answer 18

Monitoring and regulating prices
Standards of customer service
Opening up markets - lowering barriers to entry
Acting as surrogate competition

Question 19

Strengths of UK regulator system

Answer 19

Regulators are independent - specialist knowledge of industries
It is flexible

Question 20

Weaknesses of the UK regulatory system

Answer 20

Imperfect information
Regulators may become more lenient when they work with a firm for time
Regulators are costly

Question 21

Price of OFGEM

Answer 21

£38 million - paid by energy companies

Question 22

Impact of government intervention

Answer 22

Lower prices
Lower profits
More allocative efficiency but less dynamic efficiency
Higher quality
May be more or less choice - less entrants due to fear of meddling but they work to increase competition