gov intervention

Question 1

what is state provision

Answer 1

the direct provision of goods + services by the gov free at the point of comsuption

Question 2

what do we assume about state provision

Answer 2

government has full knowledge of SC and SB (knowing all externalities and the socially optimum level)
- therefore is used to to solve underproduction/ underproduction issues AND solve inequity issues due to universal access (p=0)
- solve missing market issues = reach socially opt level and reach rev max and allocative efficiency

Question 3

major issues of state provision

Answer 3

excess demands (p=0)
- Qd is further than Qs
- prices cannot rise to ration out excess demand due to universal access
- for example in healthcare patients are treated based on the severity of their conditions determines when you get treatment - therefore live in pain if conditions not considered serious enough
- gov may say to services to deal with excess demands like having large queues and waiting rooms, lots of children in classrooms (burden of excess demand)
- people may consider to go into privatisation of that service (maybe government intervenes to provide this) in order to alleviate pressure

huge costs
- cuts to other areas og gov spending
- opportunity cost
- LR funding

asymmetric information - don’t actually know the socially opt level - means Qd may not be at appropriate level = market failure (overdoing allocation of resources/ too low will lead to worsening of excess demand)

INEFFICIENCY - lack a profit motive
- costs tend to be much higher (OPP COST)

Question 4

examples of regulatory bodies

Answer 4

ORR (railway regulators)
OFCOM (telecommunications)

Question 5

what is the aim of competition authorities

Answer 5

to ensure the public interest in being protected

Question 6

the role of regulation/ competition authorities

Answer 6

prevent excessive pricing
promote competition
ensure quality, standards, choice
promote innovation (profits being used for consumer benefit)
regulate natural monopolies (privatisation is effective)

Question 7

when might regulation take place?

Answer 7

collusion/ cartel agreements
investigate mergers
liberalise highly concentrated markets

Question 8

what is privatisation

Answer 8

when state run (gov run) organisations are sold off to the private sector
- due to private sector having a profit motive, efficiency gains are increased
- higher competition is allowed in the market, decreasing costs and leading to further increased in efficiency
- moving towards the competitive levels of output and price levels (Pm to Pc and Qm to Qc) producing to where AR=AC

Question 9

benefits of privatisation

Answer 9

allocative efficiency - due to increased competition there is an increased efficiency, more motive to produce at higher qualities = greater consumer satisfaction

decreased X inefficiency - reduction in waste, decreasing costs and maximising profits)

Dynamic efficiency gains do to profit motive, this allows for reinvestment in the LR - decreases prices in the LR and benefit consumers (improved innovation and lower prices)

Question 10

negatives of privatisation

Answer 10

flocking of firms into the market may lead to limited competition - this leads to allocative inefficiency (firms may not strive to produce at the best quality since there is limited comp) and productive inefficiency (not produce at the lowest point on the AC curve)

due to profit motive - there may not want to be the want to run loss making firms however there is high demand from consumers which may cause issues

Question 11

what is nationalisation

Answer 11

process of taking an industry into public ownership (run by the gov)

Question 12

benefits of nationalisation

Answer 12

greater EOS - productive efficiency gains lead to lower AC and therefore lower prices for consumers
- focus on service provision, meaning the needs and wants of the consumers are met, allowing allocative efficiency, maximising CS
- less likely to be market failure arising from externalities since social opt levels are being maximised, minimising overall oveprod/consump = AE gains

Question 13

negatives of nationalisation

Answer 13

risks of diseconomies of scale if firm/ company grows too large, exceeding opt levels
(communication, coordination)
- there are a LACK of incentives (due to lack of profit motives) for state runs to minimise costs = wasteful production creeps in = X-inefficiency
- lack of supernormal profits = Dynamic inefficiency - not able to reinvest into innovation and R+D = reduces benefits to consumers and their satisfaction in LR

Question 14

evaluations for nationalisation

Answer 14

funding vs delivery
- there are huge costs tax payers have to share burden as a result of nationalisation but if society benefits from better delivery of public service rather than private service then this is overall positive

if there is strong regulation, there will be no need to fully nationalise a market/ service and thus reduces the risks/ impacts this has on society/ firms - alternative

Question 15

what are the ways in which gov intervention can promote competition + contestability

Answer 15

deregulation
privatisation
competitive tendering

Question 16

what is deregulation

Answer 16

when govs reduce their legal barriers to entry to incentivise more firms to enter the market = higher competitive gainsb

Question 17

benefits of deregulation

Answer 17

due to more firms producing = more choice = satisfying the wants + needs of consumers = AE where P=MC - making sure their are ahead of comp
- prod + X efficiency (minimising costs and maximising profits) + reducing any waste in the company
- increased DE due to some higher profits being made - can be reinvested into R+D and innovation, getting a chance to improve and get ahead of comp = lower costs over time + gain market share

Question 18

negatives of deregulation

Answer 18

loss of natural monopoly (if originally was) = decrease in AC = reduces prod efficiency
- due to wasteful duplications of resources of too many firms producing the same goods/service = allocative efficiency
- local oligopolies + monopolies formed = abuse power and lead to increased prices and decreased Q

Question 19

what are ways in which gov intervention can protect suppliers and employees

Answer 19

restrictions of monopsony power of firms through regulations to ensure suppliers aren’t exploited - for example if the firm pays suppliers months and months after receiving the product = suppliers may go bankrupt because of waiting for money + firms may hold onto earned interest in the bank
- GCA ensures retailers treat their suppliers fairly, investigating complaints from suppliers and arbitrates disputes
- fines up to 1% of sales with deadlines for payments to suppliers
employees:
- may be vulnerable to exploitation by employer
- legislation provides rules on health and safety, employment contracts, max working hours, trade union rules

NATIONALISATION
- employees benefit from greater job security

Question 20

explain the role of the CMA

Answer 20

work to promote competition for the benefit of consumers + investigate and prevent mergers
- bring criminal cases against indvs who participate in cartels
- investigate abuse of market power - price fixing, taking action against anti-competitive behaviour

Question 21

what is the impact of merger prevention by the CMA

Answer 21

by preventing mergers = consumers aren’t exploited by increased prices, poorer quality, reduced choice = prevent firms from gaining monopoly power
cost - greater comp provides stronger incentive to keep x-inefficiencies to a min
innovation - greater comp provides stronger incentive for firms to innovate ( greater DE)

HOWEVER
CMA may suffer from regulatory capture and asymmetric info not having all info necessary to make a decision
- hence why only few merger are investigated each year

Question 22

what is regulatory capture and causes

Answer 22

(suppliers) regulated firms are able to gain influence over their regulators - making the regulator act in the firm’s interest rather than the consumer’s = gov failure
= consumer interest damaged in LR (due to suppliers not held to account and regulators no enforcing the minimum standard service)
= prices increase = fall in real incomes = regressive effects on lower income household

CAUSES
- asymmetric info where firms rely on critical info from firms such as their costs, investments (firms may give them wrong amounts)
- under-resourced = regulatory agencies not having sufficient funds to scrutinise industries appropriately
info gaps - not understanding the complexities of the industry - such as the risks in the financial system

Question 23

what is asymmetric information in government intervention and solution

Answer 23

regulatory bodies use information provided by industries
- make it difficult for the authorities to investigate and discover anti-competitive behaviour because people operating the firms are likely to know much more about the market than the regulators

HOWEVER
- government can hire experts which have worked in the industry before = decreases asymmetric information
- or ex-employees of the industry

Question 24

how can price regulation control monopolies and negatives

Answer 24

imposed a price ceiling by which prices are not allowed to increase the next year beyond the RPI (rate of inflation)
- leads to decrease in PRICES and decrease in QUANITITY = comp outcomes
- RPI -X (x= %) to restrict the level in which firms can increase prices below the RPI - firms incentives is to cut costs as much as possible be low X = greater profit margins when prices are increased by RPI-X
- RPI -K (% whereby enough profit is made to allow capital investments)

IMPERFECT INFO
- don’t have perfect information to allow the appropriate level of X/K because if set too low = no comp outcomes produced and if set too high = shut down firms (profits not generated)
- regulatory capture

Question 25

how is profit regulation used to control monopolies and negatives

Answer 25

costs are covered but adding % rate of return on capital employed (reflecting profits made in the future)
- LR through greater productivity = increased amount of profits

HOWEVER:
- asymmetric info - firms have incentive to overreport costs + capital employed = regulated profit is higher in the LR
- incentive to actually over employ capital bcs each machinery will increase the rate of returns = increased profits allowed to be made

Question 26

gov policies which help achieve allocative efficiency and how and ev

Answer 26

price regulation (RPI-X)
subsidy on product

reduce price towards P=MC
- monopolies tend to operate at p=mc

-gov failure
- lowering price could create LT supply issues
- such as price cuts in electricity could lead to more power cuts in the LR

Question 27

gov policies to achieve productive efficiency
- how and ev

Answer 27

subsidies of key raw materials (making them cheaper)
- policies which increase productivity

costs fall = shift in MC and AC (variable costs)

• unrealistic for gov to spend subsidising materials
• LT lag for cost gains from productivity

Question 28

gov policies to achieve dynamic efficiency how and ev

Answer 28

subsidies (tax breaks on investment)
patent box - reduced profits from new patents
strengthening patent laws

• incentive to innovate/invest is increased
• subsidies/ tax breaks make spending on innovation more affordable

stronger patents = greater monopoly power
too many patents = become lazy to innovate and make more money

Question 29

gov policies which achieve X-efficiency how and ev

Answer 29

promotion of competition to reduce cost wastage
reducing barriers to entry RPI-X price capping

more comp means firms have a stronger incentive to be cost competitive
RPI-X cap targets x-efficiency directly

gov limited in which barriers they can lower
hard for regulator to identify value for X-ineff