3.6 Government intervention Flashcards
What is the role of the competition policy
Competition policy seeks to improve the competitive nature of markets
It seeks to alleviate market failure in order to protect the interests of consumers (consumer welfare) and society as a whole
How do the competition policy improve the competitive nature of markets and protect consumer welfare
- Curtailing monopoly power and protecting competitive markets
- Restricting mergers and prohibiting cartels. If a merger creates a firm that is deemed to have too much monopoly power it won’t be allowed
- Improving the way in which markets work e.g. providing greater information
- Creating fairness in markets for both firms and consumers so that firms don’t abuse their dominant market position but are able to make acceptable profits that will drive innovation and increases in productivity
- Increasing productive, allocative, static and dynamic efficiency
Government intervention to control monopolies
Explain price regulation
This forces monopolies to use the RPI – X formula where X is equal to the expected efficiency savings that monopolies will make due to their scale of production
* This is used for most privatised industries, such as water, gas and electricity
* It gives an incentive for firms to be as efficient as cutting costs and reducing water will lead to greater SNP. It prevents excessive P’s and ensures that gains are passed onto the consumer.
Disadvantages of price regulation
- Level of X? –> assymetric infomation, if X is too high, firms may shut down/ not make enough SNP but if X is too low, it prevents competitive outcomes
- For regulatory bodies to go into firms and investigate, its time- consuming and costly–> opp. cost for taxpayer
- Incentive to keep decreasing X
- Regulatory capture, which can lead to less stringent regulation
Government intervention to control monopolies
Explain profit regulation
Covering costs and adding % rate of return on capital employees. e.g. an additional tax on profits or a removal of barriers to entry such a control of supplies
Disadvanatges of profit regulation
- Costs are difficult for the CMA to calculate (assymetric infomation)
- Firms often try to inflate their perceived costs so as to make more profit than allowed
- Monopolies have no incentive to lower costs, so if costs are higher than they would be in perfect competition consumers still end up paying higher prices
- Incentive to over-employ capital, which increases ratee of return, increasing level of SNP
- Even with this policy in place, natural monopolies seem to post record profits year on year
Government intervention to control monopolies
Explain quality standards
- Ensures that consumers are not being exploited
- Often, consumers have no alternative/ substitutes but to buy from the monopolist e.g. they can only buy water from their local water board
- Minimum standards are set and financial penalties are imposed if these are not met
Government intervention to control monopolies
Explain perfomance targets
- These targets are set across a range of industries such as the NHS, police and education
- They have monopoly power in the public sector
- However, this had led to a focus on quality at the expense of quality e.g. a GP seeing a set no. of patients in a given hour may lead to GP’s not diagnosing appropriately
Government intervention to promote competition and contestability
- Regulation – using competition law to stop firms abusing market power e.g. predatory pricing and cartels
- Deregulation - making it easier for new firms to enter and exit the market by liberalising markets and lowering barriers to entry
- Creating a shared technology environment – making it easier for firms to access the latest technology and information cheaply and conveniently
What is deregulation
Deregulation is the opening up of markets to new competition through the removal of rules and regulations that created barriers to entry.
Arguments for deregulation
- The creation of competitive markets will lead to economic efficiency
- Productive efficiency is created as firms strive to reduce costs in order to compete effectively
- Allocative efficiency is created as firms strive to meet consumer demand by reducing price and providing a greater range of products
- Less government intervention allows firms to produce to the needs of the market
Enhancing competition between firms through promotion of small business
How does the government provide support to small businesses
- Improving access to finance with the creation of the new British Business Bank and providing vouchers that will help to fund small businesses
- Capping business rates on small businesses to help reduce costs
- Providing support from big businesses through the Business Exchange
- Reducing bureaucracy, making it easier for small business to operate on a day to day basis. Over 3000 regulations have been targeted for improvement or scrapping
What is competitive tendering
Competitive tendering occurs when the government allow firms to bid for public sector contracts.
What is contracting out
Contracting out occurs when the public sector pays a private sector organisation for the provision of a service
What is privatisation
Privatisation is the transference of assets from the government to privately owned businesses.
How does privatisation lead to allocative efficiency
Allocative efficiency occurs as market forces ensure that goods and services are produced to meet the needs of the consumer
This leads to greater choice and lower prices as firms compete supernormal profits away
How will profit regulation impact suppliers in the energy market
A profit cap will result in lower revenue so lower profit. This results in less dividends for shareholders and falling share prices. Capping profits means there’s less funds to invest in infrastructure and innovation, which are crucial for long-term sustainability and efficiency so risk of energy supplies in the future. This could result in a change in objective from profit maximisation to sales maximization, reducing SNP further
How will profit regulation impact consumers in the energy market
For consumers, regulating energy suppliers’ profits can lead to lower energy prices. When profit margins are capped, suppliers may be incentivized to operate more efficiently, passing savings onto consumers. This can make energy more affordable, particularly for low-income households, enhancing overall consumer welfare. Additionally, consumers may benefit from improved service quality and reliability as suppliers focus on maintaining their customer base in a competitive environment
How will profit regulation result in unintended consequences in the energy market
Profit regulation could lead to substantial lessening of competition. Suppliers might reduce the incentive to enter the market or expand their services. This could ultimately result in a stagnation of service improvements and technological advancements. This reduces dynamic efficiency, reducing process innovation, which reduces consumer choice, worsening allocative efficiency.
