3.6 Government Intervention Flashcards
Who are the CMA?
Competition and Markets Authority
What do the CMA do?
They work to promote competition for the benefit of consumers and investigate mergers and breaches of UK and EU competition law, enforce consumer protection law and bring criminal cases against individuals who participate
in cartels.
how do the CMA enforce their rulings
They impose financial penalties, prevent mergers taking place and force
businesses to reverse actions already taken
How are mergers assessed?
- in terms of the specific circumstances of each case, considering whether there will be a substantial lessening of competition
- The CMA will consider the likely competitive situation if the merger goes ahead
compared to if it does not, and the merger will be approved if its potential benefits are greater than its cost.
when is a merger investigated
A merger is investigated if it will result in market share greater than 25% or if it meets the turnover test of a combined turnover of £70 million or more.
what are the aims of preventing mergers
- So they do not exploit their customers by raising price, offering poorer quality service and reducing choice.
- It can prevent firms from gaining monopoly power.
problems with the CMA
the problem is that very few mergers are investigated each year. The
CMA can suffer from regulatory capture and may not have all the information necessary to make a decision.
Why do regulators set price controls
to force monopolists to charge a price below profit
maximising price, using the RPI-X formula.
What does X represent
The expected efficiency gains of the firms and the aim is to ensure firms pass on their efficiency gains to consumers.
What incentive does price capping give to firms
to be as efficient as possible
price capping
where firms are allowed to charge up to an agreed maximum price
benefits of price capping
- more affordable
- not in interst of firms to expolit consumers
- keeps inflation under control
drawbacks of price capping
- distorts market
- less money to reinvest
- prevents growth of firms leading to a monopoly
- loss of jobs
- prices may be put up depending on cap
- government tax revenue decrease
why would a maximum price to be set?
- ensures monopolies are allocative efficient
profit capping
capping the amount of supernormal profit a firm is allowed to earn
the aim of profit caping
- aims to encourage investment
- prevents firms from setting high prices.
problems with profit caping
- a reduction in costs will not improve the firm’s situation and so there is little incentive to be efficient.
- asymmetric information
windfall tax
a once off additional tax on firm’s supernormal profit
problems with windfall tax
- discourage investment
- a once off payment so no real effect
- creates uncertainity in the tax system
- LT impact on firms average costs
why will monopolies produce high quality goods
Monopolists will only produce high quality goods if this is the best way to maximise
profits.
what can the government do about quality
The government can introduce quality standards, which will ensure that firms
do not exploit their customers by offering poor quality.
what is the problem with quality standards
It requires political will and understanding to introduce
what is yardstick competition
Such as setting punctuality targets for train operating companies based on the best-performing European train operators. It is also possible to split up a service into regional sectors to compare the
performance of one region against another
How could government set performance targets
They could set targets over price, quality, consumer choice and costs of production. It will help firms to improve their service and lead to gains for customers.
Problems with performance targets
- The problem is that firms will resist the introduction of targets, so again it requires political will and understanding.
- They will also attempt to find ways to meet targets
without actually improving,
Breaking up a monopoly
when the government decides that a monopoly has become too big and forces to sell of parts of its business
Benefit of breaking up the monopolies
- lead to lower prices and profits
- greater consumer choice
drawbacks of breaking up a monopoly
- loss of economies of scale
Subsidies
- This will reduce their MC and encourage them to produce where the cost to society is equal to the value society places on it
self-regulation
When monopolists come under the threat of regualtion, they tend to suggest that they should regualte themselves through codes of practise.
Why is self rgulation beneficial to government
it means they don’t have to pass legislation and industries police themselves rather than having to pay workers to enforce regulation.
How can the government increas competition witin small businesses
- the government can give training and grants to new entrepreneurs
- encourage small businesses through tax incentives and subsidies
Why do the government promote small businesses
It increases innovation and efficiency, since new firms are likely to provide new
products and incumbent firms will no longer be able to be X-inefficient.
What is deregulation
the reduction or elimination of government power in industry
benefits of deregulation
- allows business to choose
- can negotiate better prices
- more flexible
- innovation
- investment
- increased economic activity
- improved services
drawbacks of deregulation
- creates monopolies
- may not protect conusmers best interest
- no insight or transparency
- commit fraud
- creates a new system
- new firms go bust
benefits of regulators
- forces through better standards
- evidence of very heavy fines being imposed
- keeps prices under control
- prevents excessive profit maximisation
drawbacks of regulators
- regulatory capture
- firms need supernormal profits to reinvest
- inflation changes after RPI+X set
public private partnership
contractors pay for the construction costs, they then rent the finished project back to the public sector
benefits of public private partnership
- saves government buildings
- saves government borrowing
- expertise from the firm
- incentive to come in on budget
drawbacks of public private partnership
- profit driven
- long-term costs
- unnecessary improvements- lost control
- government may still need to step in
- taxpayers are the one paying
How does deregulation promote competition
This will increase efficiency in the market by
allowing greater competition as more firms can enter and conduct more activities
than they could before
How does competitive tendering promote competition
This helps to minimise costs for the government and ensures efficiency by
allowing for competition in the market. The private sector will have more experience running the projects, so it is likely they will be better managed.
restriction on monopsony power
- Monopsonists are able to exploit suppliers by reducing prices. The government can prevent these by passing anti-monopsony laws which make certain practices illegal
- Fines can be put in place for those who exploit their power and minimum prices may be introduced to ensure suppliers are paid a fair amount.
how does the governemnt prevent workers rights
The government protects employees through health and safety laws, employment contracts, redundancy processes, maximum hours at work and the right to be
in a trade union.
Privatisation
The sale of government equity in nationalised industries or other firms
to private investors
Aim of privitisation
The aim is to revitalise inefficient industries but can sometimes lead to higher prices and poor services.
Nationalisation
when a private sector company or industry is brought under state
control, to be owned and managed by the government.
Advanatges of privitisation
- encourages greater competition
- Managers become more accountable
- reduce the public sector net cash requirement
- reduces government interference
- invest with greater certainty
Disadvantages of privitisation
- natural monopolies it may be fairer for the
government to own the firm since they won’t abuse their monopoly position. - industries are important because they effect success of other industries
- externalities and inequality.
- negatively affects that the PSNCR
Advantages of nationalisation
- Investment is needed for the long term
- better for a national monopoly
- government will consider externalities.
- guarentees a minimum level of service
Disadvantages of nationalism
- principal-agent problem and moral hazard
- X-inefficiency
- influenced by government’s decisions
- government may not have enough money to invest
Natural monopoly
a natural monopoly exists because the cost of producing the product is lower if there is just a single producer than if there are several comepeting producers.
Impact of government intervention on profit/price
- Governments are able to prevent monopolies charging excessive prices and aim to limit their profit.
- They try to ensure that consumers pay fair prices, receive a good quality service and have a lot of choice through different methods of regulation and target setting.
- High regulation may force some firms out of the industry, which would reduce choice.
Impact of government intervention on efficiency
- They can increase efficiency in a market by increasing competition and contestability.
- By regulating prices, they ensure a business keeps their costs low and so prevent X-inefficiency.
- They try to increase dynamic efficiency by encouraging investment. However, if the government regulates too strongly, they can push costs up and led to inefficiency.
Impact of government intervention on quality
- If the government runs a business, in theory, they should reduce prices and
increase quality as they aim to benefit consumers. - lower cost due to economies of scale
why are public sector businesses likely to be allocatively efficient
they aim to maximise social welfare
why is the government x-inefficient
they have no incentive to be efficient due to the lack of competition. This may push up prices and reduce the quality of a good; the private sector may have expertise and knowledge which the government might not have.
Impact of government intervention on choice
The government are likely to offer less choice, since there is only one company
producing the good.
When does regulatory capture happen
This occurs when the regulator is captured by the firm/industry they are regulating.
Problems with regulatory capture
The fact that the regulator will often meet with the firm’s employees will mean they become more empathetic and able to ‘see things from their perspective’, which
will remove impartiality and weakens their ability to regulate.
why doesn’t regulatory capture always work
- Large corporations can invest huge amounts in learning how to play the system and in gaining the support of their regulator. - It also is likely that the regulator will have
worked in the sector for many years, as these people will have experience and knowledge of the industry. - they will have personal connections with those that they are regulating and this makes it difficult for them to be unbiased.
Assymetric information as a limit
This is where regulatory bodies have to use information provided to them by the industries when setting price targets etc
Why may there be assymetric information due to gov intervention
It is in the industry’s best interest to maximise their profits and so may provide inaccurate or limited information, meaning
regulators are unable to set correct targets, prices etc.
