1. The Market Mechanism, Market Failure and Government Intervention - Competition Policy Flashcards
Who enacts competition policy?
Main body - Competition and Markets AuthorityThis controls specialist regulatory bodies - e.g. OFCOM, OFWAT & OFGEMAlso, European Competition Commission control EU competition & the UK must follow this also
What are the aims of the competition policy?
Protect the public interest;1. Prevent excessive pricing2. Promote competition in highly concentrated markets3. Ensure quality, standers and choice4. Regulate natural monopoly & ensure effective privatisation 5. Promote technological innovation
When will we see competition policy?
If there are any anti-trust and cartel agreementsTo investigate mergersTo liberalise concentrated marketsTo monitor state aid control
What is one type of monopoly regulation? (1)
Price regulation - prices aren’t allow to increase next yr beyond RPI Or RPI-x regulation - restrict price rises below RPI, x = a given % - encourages efficiency and cost cutsOr RPI+/- x (used in water industry) only allows enough profits to enable capital investment (this may be more or less than RPI)
What is the rational of price regulation in a monopoly?
To set max. prices at the allocativley efficient level to decrease prices and increase quantity
What are the problems with price regulation of monopolies?
Information issues - how do we decide on the required level of X or K that is appropriate Very costly to the taxpayer to examine the costs & revenues of each firmRegulatory Capture - corruption as regulators may know owners who ask for lenient restrictions - ineffective regulation
What is another type of monopoly regulation? (2)
Quality controls - e.g. Train service have to meet certain targets & NHS have to see certain no. of patients/hourBUT;may lead to unintended consequences - like GPs rushing and missing illnessesmay lead to ‘gaming the system’ - train companies extending journey times to avoid delays
What is another type of monopoly regulation? (3)
Profit controls - allows costs to be covered and allows some capital investment BUT;asymmetric information - monopolists will over-report costs and capital investmentincentive to over employ capital and costs
What is another type of monopoly regulation? (4)
Windfall taxes on profitBUT;this only drives up costs - worsens monopoly outcomesmay lead to tax evasion and avoidancemay discourage innovation
What are 4 other types of monopoly regulation bodies may employ?
Merger Policy - forced sale of stores in high conc. areasPrivatisationDeregulationReducing trade barriersAll of the last 3 aim to promote competition and liberalise markets
What are the evaluation points for competition policies?
What is the risk of gov. failure?Depends on the lvl of informationCosts - taxpayer pays for bodies v Benefits - increased competitionRisk of regulatory captureLose the benefits of monopolies
