Government Intervention Flashcards
(28 cards)
Price controls: definition
Putting a maximum price to which certain markets are allowed rise to but not go past.
E.g gas, food, petrol, rent
Price control: benefits of a price cap on rent
Helps essential low wage economy
Prevents excessive rent
Landlords still make acceptable profits
Spreads people’s incomes
Price control: disadvantages to a price cap on rent
Rich people take advantage of the system
No incentive to buy property to rent or build
Shortage of property
Interferes with the free market
CMA: Competition and Mergers Authority
What do they do
They work to promote the competition for the benefit of the consumer
CMA: how do they do their job
Investigate mergers
Investigate laws
Enforce consumer protection
Bring criminal penalties
Work with the European competition commission
Investigate issues with competition and customers
CMA: markets they have investigated
Energy Banking Insurance Milk Pay day loans Betting
CMA issues
Time- 2 years
Lack of persecution
Regulatory pressure (pressurise the regulator)
Firms argue monopolies aid the consumer
Top managers at CMA switch to the other side
CMA Anti completion:
A company work with another one so that they sell prices equally in order to not lose any market share.
CMA Example:
Spread information about all banks so that the consumer picks the one they want.
Windfall tax: definition
A one off tax on a supernormal profit making firm. E.g banking, energy, oil
Windfall tax positives
Forces firms to drop price Cheaper products for all Makes an inelastic product more available Uses tax to give subsidies to poorer Threat
Windfall tax negatives
Leads to higher AC
Unfair
On its OWN it won’t work
Could lead to firms not reinvesting
Performance targets: definition
Regulators set targets in the absence of competitors
Performance targets: regulators for rail, energy and water.
Rail (ofrail)
Energy (ofgem)
Water (ofwat)
Performance targets: how do you calculate the price rise
RPI +- X (rail, energy)
RPI +- K (water)
Performance targets: reasons for regulators
Guarantees very high standards
Forces firms to reinvest into infrastructure
Excessive supernormal profit does not occur
List the types of government intervention:
Price controls Breaking up monopolies Windfall taxes Performance targets Privatisation and nationalisation Deregulation Subsidies Self regulation
Natural monopoly: definition
A monopoly that forms by itself
Natural monopoly: characteristics
Exceptionally high set-up costs- into billions
Exceptionally high fixed cost -salaries
Massive economies of scale are needed to reduce AC
As times goes on MC is minimal
Natural monopoly: sunk cost definition
A cost you cannot recover once you have spent it– advertising
Natural monopoly graph: explain it
The LRAC and LRMC and both sloping with the MC underneath the AC
MR and AR same as monopoly
Deregulation: definition
The reduction or elimination of government power in a particular industry. Usually done to create more competition.
Deregulation: problems with the government owning and controlling firms
Inefficient
No competition
No incentive to reduce AC
No opportunity, money better spent elsewhere
Deregulation pros
Increase competition leads to greater efficiency which leads to cheaper prices and costs
Government regulation often involves excessive costs of bureaucracy
