3.6 Government Intervention Flashcards
What is the CMA?
CMA is the authority that work to promote competition for the public interest.
What are the main aims of competition policy?
- Prevent excessive pricing
- Promote competition
- Ensure quality, standards and choice
- Regulate natural monopolies
- Promote technological advances; dynamic efficiency
What are the main forms of consumer exploitation that the CMA try to prevent?
- Higher prices
- Less choice
- Poor quality products
Why do CMA monitor merger activity?
- Aim to prevent single firm from gaining >25% market share
- To ensure level of competition is healthy
Why do CMA monitor mergers?
To prevent exploitation of customers in forms of;
- Excessive pricing
- Poorer quality service
- Reduction in choice
Why do CMA monitor monopolies?
CMA control monopolies that exploit their dominant position and deemed anti-competitive.
What are the 3 different price regulations CMA can introduce to monopolies?
- RPI; prices allowed to increase up-to RPI
- RPI - X; prices allowed to increase up-to a level below RPI to encourage efficiency savings
- RPI+/- k; k represents level of investment
How does price regulation for monopolies cater to public interest?
RPI-X/RPI+k gives firms incentive to be efficient to lower costs by more than X to enjoy increased profits. Prevents excessive pricing
Max price at allocative efficiency point
Price regulation benefits
Increased efficiency
- Incentive to decrease costs to protect profits
Increased innovation
- To reduce cost of production
Prevents excessive pricing
- Consumers protected
Eval of price regulation to monopolies
Calculation for level of X/k
- information gap to difficult to calculate due to rapid advancements in tech and FoPs
Cost of regulation
- Taxpayers money could be used better somewhere else
Regulatory capture
- Regulators who previously worked in industry have relationships with current owners/employees; could lead to letting them off regulation.
Exact point of AE
- Hard to set point at exact AE point due to information gaps
Reduced efficiency
- Can’t increase price
Reduced investment
- Less SNP; less investment
How do the CMA implement profit regulation?
% profits on total cost
Benefits of profit regulation
Protects consumers
- Prevents excessive pricing; no point
Increased innovation
- Better quality products; increased demand; capture market share
How does quality control/performance targets regulation cater to public interest?
Ensure monopolies aren’t complacent to where consumers don’t get their products and consumers aren’t exploited.
Eval of quality control/performance targets regulation.
Firms taking shortcuts, lower quality
e.g GPs seeing a certain amount of patients; may lead to shortcuts, rush, inaccurate diagnosis.
Hard to calculate what quality/ performance target should be met
How does windfall/big taxes regulation cater to public interest?
Big taxes on monopolies cut their supernormal profits; forces them to reduce AC to maintain profits; encourages to reinvest profit; dynamic efficiency
Eval of windfall taxes regulation
- Tax on profits; increase marginal costs; pass cost onto consumers; reduce Q; worsens monopoly outcomes
- Under-reporting of profits
- Promotes tax evasion/avoidance
What are the 4 ways to promote competition and contestability?
- Promotion of small business
- Deregulation
- Competitive tendering
- Privatisation
How does promotion of small business promote competition and contestability?
Providing subsidies to new firms to join industry; increases competition
How does deregulation promote competition and contestability?
Removal of legal barriers to entry allows for firms to enter easily; increases competition
What is dereglation?
Deregulation is when governments reduce legal barriers to entry.
Incentivise markets to enter; increase comp
What is deregulation?
Deregulation is when government reduce legal barriers of entry
Incentivise more new entrants; promote competition/efficiency
How does competitive tendering promote competition and contestability?
As a major provider of goods/services in the economy the government could choose to manufacture many products itself & this would decrease competition.
By outsourcing the supply of these products it generates more private sector activity & increases competition
Advantages of deregulation
More consumer choice
- More firms; increase competition; incentive to be AE
Productive/X efficiency
- Incentive to minimise costs and maximise profits; stay ahead of competitors
Dynamic eff
- Profits made reinvested; keep up with competition
What is privatisation?
Privatisation is when the state-run organisations are sold off to private sector.
Disadvantage of deregulation
Loss of natural monopoly
- Increase AC, reduction in PE, wasteful duplication of resources
Formation of oligopolies and monopolies
Height of other barriers
- Legal barriers reduced but other barriers may be high
Why may the government aim for privatisation?
Privatisation helps promote;
- competitive market
- efficiency
How does privatisation promote competitiveness and efficiency?
Privatisation promotes competitiveness as;
- Firms able to enter the market; more competition in industry
Privatisation promotes efficiency as;
- firms have profit motive; firms become more efficient to lower costs and make profit.
How does privatisation improve allocative efficiency?
Privatisation causes more competition; gives incentive to produce products consumers want and of high quality.
How does privatisation improve X efficiency?
Firms need to decrease costs to keep up with competition; so firms let less waste creep in and are less complacent
How does privatisation improve dynamic efficiency?
As firms get more competitive through their profit motive, they invest their profits to keep up with competition.
Disadv of privatisation
Natural monopolies
- Privatised natural monopoly may mean firms abuse monopoly power
What is nationalisation?
Nationalisation is the process where governments buys and runs privatised industries
Nationalisation is when a private sector company or industry is brought under state
control, to be owned and managed by the government
Adv for nationalisation
Greater EofS
- State-run monopoly, greater potential for EofS
More focus on service provision
- Aim for social welfare; allocative efficient benefits
Less market failure from externalities
- Government operates at social optimum level; consider social costs/benefits; produce at socially optimum Q; allo. eff up
Vehicle for macroeconomic control
- Manipulate wages to control inflation/unemployment
Disadv for nationalisation
DEoS
- Public sector firm can be huge; communication/motivation/coordination issues; higher consumer price
Lack of incentive to minimise costs
- Complacency due to 0 competition; X-inefficiency; price increase
Lack of supernormal profit
- No profit motive; dynamic inefficiency; no R&D/innovation
Burden on taxpayers/deficit
- State companies expensive to run; burden on taxpayers/deficit
