3.6 Government Intervention Flashcards
government intervention
- the Competition and Markets Authority (CMA) is the main UK competition regulator
- they aim to promote competition and ensure markets are efficient
- they also aim to protect consumer interests by keeping prices low and widening consumer choice
govt. intervention to control mergers
- CMA investigate / monitor potential mergers between two large firms
- if the merger / takeover is likely to create a larger firm with monopoly power, it’s likely to be prevented
- if there are some concerns, they may allow it to go ahead but insist the firm sells certain assets to limit its market share
govt. intervention to control monopolies
- holding a dominant position isn’t wrong but if the firm exploits their power to stifle competition, they’re deemed anti-competitive
- monopolies are seen as allocatively and productively inefficient, so it can be argued they need to be controlled
- the govt. can control monopolies through;
- price regulation
- profit regulation
- quality standards
- performance targets
price regulation
- regulators can set price controls to force monopolists to charge below profit maximising price, using the RPI-x formula
- RPI (real price index) - x (the expected efficiency gains of firms)
+ aims to prevent excessive prices and ensure firms pass on their efficiency gains to consumers
+ incentivises firms to be as efficient as possible because if they can lower costs by more than x, they’ll enjoy increased profits - mainly used in privatised utility industries
- sometimes a value of K is added to the formula to allow for investment in the industry, so the formula becomes RPI-x+k
- e.g. it’s used in the water industry and has allowed investment of £130bn
- same benefits as the original, but it allows for future infrastructure investment
- issue is that it’s hard to know where to set x+k due to rapid technology improvements and as firms can lie about their efficiency gains as there’s asymmetric information
- if x is too high, firms may shutdown as they can’t make enough, but if x is predicted too low, it’ll be ineffective
profit regulation
- govts. can control the profits that firms earn by ensuring they’re not excessive
- in the UK, firms have to pay corporation tax on any profits they earn (currently 25% - reduce rates to encourage investment)
- issues include;
- it worsens the monopoly outcome as costs are moved to consumers
- tax evasion / avoidance as firms under-report profits
- less dynamic efficiency as they have less profits to reinvest
quality standards
- firms may reduce the quality of goods to cut costs and maximise profits, so regulators can insist certain quality standards are met
- e.g. electricity generators are forced to have enough capacity to prevent blackouts
- regulators monitor whether standards are met, and if they’re not then they can impose fines
performance targets
- regulators can set targets for price, quality, consumer choice, costs of production, etc. to help firms improve their service and lead to gains for customers
- e.g. GPs may be given a target for a set no. of patients per hour
- however, there may be unintended consequences, e.g. if a GP rushes to fit a set amount of patients, they may not be diagnosed properly
- a sanctions regime also needs to be implemented for it to be effective, which then increases administration costs
govt. intervention to promote competition and contestability
- promotion of small businesses; providing tax incentives or subsidising small firms can help increase the number of new entrants into industries, and thus promote competition and prevent monopolies
- deregulation; removing govt. regulations can promote competition and decrease barriers of entry, which increases contestability of the market
- competitive tendering; the govt. could outsource supply of some goods / services they provide to generate more private sector activity and increase competition - the firm offering the lowest price and best quality of provision wins the govt. contract which saves the govt. money as the public sector can be inefficient, and the private sector has an incentive to reduce costs as they operate in a competitive market (however, private sector firms may cut costs by lowering wages and they’re less likely to have social welfare as a priority)
- privatisation; encourages new entrants to the industry as they feel they can compete more effectively with private firms which don’t have access to all of the govt’s resources, e.g. British Airways was privatised - gains benefits of private sector, e.g. more incentives, increased welfare, etc.
govt. intervention to protect suppliers
- monopsony power is abusive towards suppliers, e.g. this power of supermarkets has led to many farmers losing profits
- govts. can pass anti monopsony laws and issue fines if breaches occur
- they can encourage firms to self-regulate and trade fairly
- they can appoint a regulator to monitor the industry’s practices
- they can subsidise firms suffering from abusive monopsony power
- they can set minimum prices which buyers have to pay suppliers
- nationalisation can also be used to break the market power of the abusive firm, resulting in better treatment of suppliers
govt. intervention to protect employees
- profit maximising firms will seek to reduce their wage bills (one of their highest costs) so the govt. can intervene to protect workers who could be exploited by firms
- e.g. NMW legislation
- legislation on health / safety, working hours, employment conditions
- permitting trade unions to operate in the industry
- encouraging firms to draw up company codes of conduct towards their employees (self regulation)
impact of govt. intervention - prices
+ prevents monopolies charging excessive prices
- but if corporation tax is high, firms may pass extra costs onto consumers through higher prices
impacts of govt. intervention - profit
+ aims to limit profits to prevent monopolies
- strict price caps can limit investment
impacts of govt. intervention - efficiency
+ reduces x-inefficiency, as firms are more competitive
+ nationalised firms are allocatively efficient
+ limiting how much a firm can increase it’s prices (RPI-x) encourages them to be more efficient, so they can lower costs and increase profits
- private sector firms have an incentive to become more productively efficient as they lower average costs to profit maximise
impacts of govt. intervention - quality
+ govt. can ensure firms are meeting minimum targets which increases quality of goods
- but this may cost firms more, so they may cut costs elsewhere
- some private sector firms have expertise and knowledge that the govt. doesn’t have so they may produce higher quality goods
impacts of govt. intervention - choice
+ increased competitiveness means more firms competing, so there’s a wider choice
+ more choice improves the standard of living and generates more economic activity
+ if the govt. reduces prices of goods / services, those who previously couldn’t afford the products will now be able to
- a strict price ceiling may force some suppliers out of the market which reduces consumer choice
