Governments Flashcards
(20 cards)
Why are governments important?
Very important part of our economic system governments influence the fortunes of all markets in countries like the UK.
Govs all markets to operate without property rights very few markets would exist at all.
What do governments do in many industries?
Create and police systems by which the key barriers to entry arise e.g. licensing, patents, copyright, trademarks etc
How to government taxes/subsides impact many markets?
Policies to correct market failures, which have been covered previously, governments are very significant buyers in many markets, governments macroeconomics policy plays a very important role
What is said about governments and Porter’s five forces?
Some say that it is so important that it is the missing sixth force in Porter’s model. Porter argues that the influence of government is part of the model as the influence is felt in each of the five forces.
What is the main impact governments have in the 5 forces?
Comes via encouraging market rivalry but recognises that governments are the single most important economic agent and effects all forces at the same level.
Governement actions actually/potentially impact each of these forces to a greater or lesser degree.
What are government market interventions?
In the microeconomy government intervention takes a number of different forms and tends to vary on a market by marker basis. There are policies to address market failure but also more broadly e.g. to encourage development
What do governments do in market pricing?
they set a minimum price to achieve certain objectives, it creates a surplus for it to be a effective policy either the surplus doesn’t matter e.g. minimum unit pricing of alcohol e.g. in Scotland and Wales or the government needs to take action to support the market.
Alcohol unit pricing would lead to a surplus - 1980s EU butter mountain and wine lake, but same outcomes can be achieved in other ways
Draw the diagram for a surplus of minumum unit pricing?
- demand0 is a downward sloping
- supply0 crosses demand0 facing upward
- point A is where supply and demand curve crosses - P* matches Q*
- there also a Pm price above P* which links to the demand line and surplus line and meets Q1 on demand curve and meet Q2 on the supply curve
- triangular area between A and the Pm prices meeting curves is the surplus
What can be set instead of offering minimum unit pricing?
To offer e.g. farmers a subsidy to produce instead, costs more but benefits go to producers and consumers. This means consumers can consume more products at a lower price, thus increasing consumption
Draw the diagram for governments offering a subsidy?
- demand0 downward sloping,
- supply0 upward sloping crosses demand0 higher up at point A and P* and Q*
- supplyS upward sloping crosses demand0 lower down at point B and Pc an Q2
- there is also a Pm price above P* and this price joins to Q1 and Q2 leading ot point C where it meets supply0
- triangular area connecting CBA is the subsidy, costs government area PmCBPc, and can consumer at a lower price of Pc.
Why would governments set a maximum price?
In order to achieve certain objectives e.g. rent control, limits on the price of basic foodstuffs to help the poor - this would lead to a shortage in the market.
Shortages significantly complicate the operation of the market and creates incentives on both the demand and supply side for finding was around the rules. But think about whether the same outcomes can be achieved in other ways
Draw the diagram for shortage creates by setting a maximum price
- demand0 downward sloping
- supply0 upward sloping crosses demand0 at point A
- point A is at P* price and Q*, there is a lower price charged of Pc as a price ceiling which crosses but demand and supply curves, and matches up to Q1 and Q2
- triangular area between point A and Pc price points is the shortage
What do governments have to impact on individual markets?
Pretty much all government’s have some form of industry policy/strategies - that are intended to impact upon individual markets and firms. One of the most common form of industry policy is competition policy
What is competition policy?
Generally encourages market rivalry, this is done by a number of ways:
1. Monitoring business conduct
2. Merger policy
What is monitoring business conduct involve (comp policy)?
government’s have active bodies e.g. competition and markets that see out abuses of monopoly e.g. investigation into cloud services and electric vehicle charging markets - look for anti-competitive conductible express pricing, collusive practices etc.
They have the power to require change, fine firms or even break up firms that have been found to have been operating ‘against public interest’
e.g. LIBOR fines or split of standard of oil.
What does a merger policy involve (comp policy)?
Competition and markets authority also have power to investigate mergers. They can requires competition remedies or even prevent them taking place.
It can result in undertaking to sell particular brands, facilities or part of the business e.g. the 2019 proposed merger of Sainsbury’s and Asda supermarkets was blocked on competition grounds. This clearly prevent very concentrated market structures from emerging.
A policy stance that favours competitive market structures over oligopolistic and monopolistic ones.
- it generally tries to balance costs and benefits of monopoly power
What does regulation involve?
consists of rules administered by a government agency to influence economic activity by determining prices, product standards and types and even the conditions under which new firms may enter a industry.
Is regulation very widely utilised?
yes, it impacts are everyday lives. Product standards - health, environments, economic etc COVID illustrates the importance of regulations.
What is regulation associated with?
with reducing the negative effects of monopolies.
Government’s try to encourage competition which is seen as a substitute but it is not always possible to introduce competition e.g. natural monopolies, so regulation is then used.
What is the scope of general regulators?
such as the competition and markets authority e.g. EU competition law in the EU which covers all markets.
Many industries or purpose specific regulators (often associated with natural monopoly industries) e.g. Ofcom, OFGEM, regulation has a cost - estimates of the Better Regulation Commission (2005) suggests that the cost of regulation was around £100bn a year which was 10-12% of GDP.
Open Europe (2015) found that 100 most burdensome EU regulation’s costs the UK economy £33.3 billion per year (which is over £6bn more than was raised annually from council tax).
Political and economic debate about what to regulate and how to do so.
