3.6 Government Intervention

Question 1

what are the ways that the gov. can control monopolies?

Answer 1

• price regulation
• profit regulation
• performance targets
• quality standards

Question 2

what formula(s) do regulators use to regulate prices?

Answer 2

• RPI-X
• RPI-X+K

Question 3

what does ‘RPI-X’ and ‘RPI-X+K’ mean?

Answer 3

• RPI = retail price inflation
• X = expected efficiency improvement
• K = investm

Question 4

what are the advantages of price regulation?

Answer 4

• incentivises firms to be efficient -> lower costs -> increased profits -> prevents excessive prices

Question 5

what are the disadvantages of price regulation?

Answer 5

• difficult to know where to set X due to rapid improvement in technology
• asymmetric info as firms can easily lie -> lead to sudden price falls

Question 6

what are the advantages and disadvantages of maximum prices?

Answer 6

+ allocative efficiency achieved if prices = MSC
- difficult for gov. to know where to set prices as they do not know the exact allocative efficient output.
- increased dynamic inefficiency as firms are unable to
maximise profit so may not invest.

Question 7

how is profit regulation calculated?

Answer 7

using the monopolist’s operating costs + rate of return on capital employed

Question 8

what are the advantages + disadvantages of profit regulation?

Answer 8

+ encourages investment -> prevents firms from setting high prices
- firms might employ too much capital to increase their profits
- if reduced costs do not improve the firm’s situation -> less incentive to be efficient

Question 9

what are the advantages + disadvnatages of quality standards?

Answer 9

+ ensures that firms do not exploit their customers by selling low quality products
- monopolies might resist this through lobbying and/or self regulation
- requires political will and understanding to introduce

Question 10

what are the advantages + disadvantages of performance targets?

Answer 10

+ helps firms improve their services -> gains for consumers
- firms may find ways to meet targets without actually improving
- requires political will + understanding

Question 11

what are the ways in which the gov. promotes competition + contestability?

Answer 11

• deregulation
• competitive tendering for gov. contracts
• enhancing competition between firms through promotion of small businesses
• privitisation

Question 12

what is meant by ‘deregulation’?

Answer 12

involves reducing or removing gov.-imposed restrictions with the aim of promoting competition, efficiency and innovation

Question 13

advantages of deregulation

Answer 13

+ innovation -> firms are free to experiment and take risks -> increased dynamic efficiency
+ increased competition -> lower prices and better services -> allocative efficiency improved
+ consumer choice increased -> new firms enter so incumbent firms expand their offerings -> more contestable -> improved economic welfare

Question 14

disadvantages of deregulation

Answer 14

• increased inequality -> large firms dominate the market -> small businesses struggle to compete
• environmental costs -> -ve externalities e.g. pollution, job losses as companies aren’t held accountable
• less gov. oversight -> reduced consumer protection
• reduced safety and quality as firms prioritise profits over consumer benefits

Question 15

what is meant by ‘competitive tendering (contracting out)’?

Answer 15

when a project is put out to tender so that private sector firms can bid for the right to provide a service e.g. school meal services; laundry services in hospitals

Question 16

what are the advantages of competitive tendering?

Answer 16

+ increased competition
+ increased efficiency
+ better value for money
+ more transparency -> contracts are ensured to be awared fairly and openly

Question 17

what are the disadvantages of competitive tendering?

Answer 17

• prioritising profit > service quality -> reduced standards
• job insecurity for public sector employees
• lack of public control -> decisions are less democratic

Question 18

how can the gov. promote small businesses and how is this beneficial?

Answer 18

• offer training or grants to new entrepreneurs
• offer tax incentives or subsidies
• increases innovation + efficiency

Question 19

what is meant by ‘privatisation’?

Answer 19

transfer of ownership of a state-owned enterprise to the private sector; can be done through an IPO (initialpublic offering) -> selling shares to the stock market

Question 20

advantages of privatisation (using Royal Mail as an example)

Answer 20

• access to capital -> can raise funds for investment and infrastructure development
• modernisation and efficiency
• liberalisation + competition -> introduces contestability

Question 21

disadvantages of privatisation (using Royal Mail as an example)

Answer 21

• job losses - new owners may seek to cut costs by reducing workforce size
• profit > service quality -> slower delivery times + lost mail
• profit motive -> higher prices for consumers
• monopoly control -> privatisation -> highly concentrated market power -> reduced competition and consumer choice -> allocative efficiency lost

Question 22

ways in which the gov. protects suppliers + employees

Answer 22

• workers’ rights
• naitonalisation

Question 23

examples of workers’ rights that the government may implement

Answer 23

• health and safety laws
• maximum hours at work

EVAL - if rights are too strong, employers would be unwilling to take on new workers due to the extra cost

Question 24

what is meant by nationalisation

Answer 24

process of transforming privately owned assets into public assets by bringing them under the public ownership of a national government or state

Question 25

advantages of nationalisation

Answer 25

ADV: - improved public interest management -> profit motives removed -> investment directed towards improving quality and affordability -> better access -> improved social welfare - more transparency + accountability: public ownership → Greater transparency due to parliamentary oversight → Improved service quality through public feedback - prevent private monopolies from charging excessive prices -> state control → price regulation → prevention of consumer exploitation → increased affordability

Question 26

disadvantages of nationalisation

Answer 26

- inefficiency + bureaucracy -> absent of profit pressure -> reduced ineffiency and innovation -> x-inefficient - increased gov. burden: lots of funding needed -> higher taxes -> reduced disposable income -> economic slowdown - lack of competition: firms can become complacent -> less efficient -> can expploit consumers by charging higher prices -> less allocative efficiency -> lower service standards as less incentive to innovate

Question 27

how can the government place restrictions on monopsony power?

Answer 27

- place anti-monopsony laws -> independent regulator to force monopsonists to buy fairly - fines if firms are overexploitative - minimum prices so that suppliers are paid fairly - self regulation (weak strategy)

Question 28

what are the aims of the government (regarding price, profit, efficiency, quality + consumer choice)?

Answer 28

- **reduce prices** -> e.g. through price regulation (max. prices) -> monopolies are stopped from charging excessive prices -> limited profits -> fair prices for consumers. could also keep coss low -> prevent X-inefficiency -> encourage dynamic efficiency -> more investment - **greater consumer choice** -> e.g. through deregulation or privatisation -> increased competition -> lower prices -> more innovation and efficiency -> better quality of goods and services - EVAL - too much regulation -> forces firms out of the industry -> reduces choice - - PUBLIC SECTOR -> aim to maximise social weflare -> allocative efficiency -> lower prices + better quality (in theory) - EVAL: no competition -> less incentive to be efficient -> suffer from X-inefficiency -> may push up prices and reduce the quality -> private sector may have more expertise + knowledge than the government - less choice (one company producing the good)

Question 29

what are the limits to government intervention and how?

Answer 29

1. **regulatory capture** -> where firms can attempt to develop a favourable relationship with the regulator -> removes impartiality -> may lead to regulations that favour the firm over consumer interests -> government failure 2. **asymmetric information** -> firms may provide inaccurate/limited information -> regulators unable to set correct targets -> government failure if regulations aren't set properly -> waste of scarce resources