3.6 Flashcards
Competition and Markets Authority (CMA)
The main competition regulator in the UK, aiming to promote competition, ensure market efficiency, and protect consumer interests by keeping prices low and widening consumer choice.
price regulation and RPI-X
Price Regulation: Prevents monopolies from charging excessive prices, which can lead to loss of allocative efficiency.
RPI-X: A form of price capping used for privatised industries (e.g., utility companies).
Calculation: If RPI is 5% and X is set at 2%, the firm can increase prices by 3% (5% - 2%).
Advantages: Encourages efficiency and competition.
Disadvantages: Determining X value is difficult; may limit profits and investment; risk of regulatory capture.
Creative Destruction (Schumpeter)
New entrepreneurs innovate, challenging existing firms, and expanding the economy’s productive potential.
red tape challenge
Simplifies regulations for businesses, especially SMEs, making it easier to meet environmental targets and create jobs.
privitisation
Transfers assets from the public to the private sector (e.g., British Airways, Royal Mail).
competitive tendering
When a project is put out to tender so that private sector firms can bid for the right to provide the service such as laundry services in hospitals.
Advantages: Saves money, reduces maintenance burden.
Disadvantages: Private sector may not meet contract specifications; may prioritize cost-cutting over social welfare.
government failure
Definition: When government intervention leads to inefficiency and misallocation of resources, causing a net welfare loss.
Causes: Inadequate information, unintended consequences, excessive bureaucracy, regulatory capture, political self-interest.
regulatory capture
When regulators act in the interests of the industry they regulate, rather than consumers.
Impact: Leads to biased decisions, reduced effectiveness of regulation, potential market failure.
asymmetric information
Information imbalance between the government and the regulated firms.
Impact: Difficulty in setting appropriate price caps and making informed decisions, leading to inefficiency and poor resource allocation.
unintended consequences
Outcomes that were not foreseen or intended by government policies.
Example: Price controls leading to shortages, subsidies leading to overproduction and environmental damage.
political self interest
Decisions influenced by political motives rather than economic efficiency.
Impact: Policies that benefit certain groups or individuals, leading to resource misallocation and inefficiency.
excessive Bureaucracy
Overly complex and rigid administrative processes.
Impact: Increased costs, reduced efficiency, and slow decision-making.
quality standards
Quality standards are the legal requirements set by regulators that ensure certain quality levels are met by monopolies.
Maximum Price (Price Ceiling)
A price set by the government below the equilibrium price to make goods more affordable, leading to a shortage.
Purpose: Ensure essential goods/services (e.g., rent, basic food items) are affordable for low-income households.
Example: Rent controls in major cities like New York.
advantages of max prices
Affordability: Makes essential goods/services more accessible to low-income households.
Consumer Welfare: Increases consumer surplus, benefiting those who cannot afford high prices.
disadvantages of max prices
Shortages: Quantity demanded exceeds quantity supplied, leading to long queues and rationing.
Black Markets: Emergence of illegal markets where goods are sold at higher prices.
Reduced Supply: Producers may be discouraged from supplying the market due to lower prices.
minimum price (price floor)
A price set by the government above the equilibrium price to protect producers’ income, leading to a surplus.
Purpose: Ensure producers (e.g., farmers) receive a fair income and can continue production.
Example: Agricultural price supports for crops like wheat and milk.
advantages of minimum prices
Income Support: Ensures producers receive a fair income, maintaining their livelihood.
Production Stability: Encourages continuous production of essential goods.
Surplus Management: Government can purchase and store surplus or redistribute it.
disadvantages of min prices
Surpluses: Quantity supplied exceeds quantity demanded, leading to wasted resources.
Government Costs: Storage and disposal of surplus can be expensive.
Higher Prices: Consumers face higher prices, reducing their purchasing power
