3.6.1 Government intervention Flashcards
Government intervention to control mergers?
- CMA aims to promote competition, lower prices for consumers and widen choice - Sainsbury’s-Asda merger has been blocked in April 2019 by CMA over fears it would raise prices for consumers.
Government intervention to control monopolies
Price regulation
Price regulation
- RPI-X, which is a form of price capping (X is the amount a price has to be cut by) e.g. Ofgem - IT encourages them to cut costs by more than X - encourages competition in the market, which can prevent the firms abusing their monopoly power.
But less dynamic efficiency can be achieved as firms keep fewer profits. Also hard to determine how much X should be. Can be regulatory capture
RPI +/-K, K is how much investment a firm must make
Government intervention to control monopolies
Profit regulation
Profit regulation
- Corporation tax - reduces profits kept - decreasing to 17% in 2020
- But less dynamic efficiency can be achieved as firms keep fewer profits
Government intervention to control monopolies
Performance targets and quality standards
Quality standards
- Regulators can observe the quality of the goods and services and ensure minimum standards are met. e.g. elderly people in colder months
Performance targets
- The government sets targets on organisations, such as NHS (waiting times), to improve social welfare
Government intervention to promote competition and contestability?
Promoting small businesses - Govt help improve access to finance e.g. grants and reduce barriers to entry such as regulation - The UK government has established the ‘Red Tape Challenge’, which aims to reduce unnecessary regulation for businesses - small firms can be more efficient Deregulation and privatisation - Deregulation - reduces government power and enhances competition as fewer barriers to entry - Privatisation e.g. Vietnam’s Vinamilk improves competition as private sector is more efficient due to profit motive - improves allocative efficiency and can improve quality for consumer - competition can also lead to lower prices - can raise revenue for the government Competitive Tendering - firms can compete to get government contracts e.g. building roads, hospitals
Government intervention to protect employees and suppliers?
Restrictions on monopsony power of firms - government can offer grants to suppliers to subsidise costs so they can make more than normal profit - CMA can intervene and restrict monopsony power - minimum wages can protect employees from being paid low wages e.g. £8.21 for 25+ since April 19 Nationalisation (when private sector assets are sold to the public sector) - social welfare is a priority, not profit, so wages will be competitive and suppliers won’t be cheated out - nationalised firms are likely to operate at allocative efficient point (P=MC) in order to increase output and reduce prices
Impact of government intervention on prices
Prices - prevent monopolies charging excessive prices by using price caps RPI-X - monopsonists are made to have less buying power - they can pass on higher costs to consumers
Impact of government intervention on profits
Profits - increasing corporation tax means investment is limited - less dynamic efficiency
Impact of government intervention on efficiency
Efficiency - private sector firms likely to operate at MC=MR to maximise profits, but public sector P=MC allocative efficiency (use revenue & costs diagram) - Private sector competition forces firms to be more efficient - profit motive so is likely to be more productively efficient
Impact of government intervention on quality
Quality - Governments can ensure firms are meeting minimum targets - Profit maximising firms might compromise on quality - However, private sector firms have the expertise and knowledge which the government might not have & they also have non-price competition in oligopolies so quality may improve
Impact of government intervention on choice
- If governments regulate monopolies and encourage the growth of SMEs, consumer choice in the market widens, since there are more firms competing - high corporation tax may lead to firms moving abroad which would reduce choice - same for if there is a strict maximum price
How does regulatory capture limit government intervention?
Regulatory capture is when regulators become sympathetic to the firms they are supposed to be regulating and operate in favour of firms rather than consumers Therefore regulation may not be enforced properly leading to a loss in social welfare
How does asymmetric information limit government intervention?
It makes it hard to determine what a price cap should be Some market failures involve a value judgement - e.g. its hard to quantify the social cost of pollution, it will vary from person to person Without sufficient information, government could make wrong decision s
