3.6 Government Intervention Flashcards
LS16-18
Why would gov. intervene when there’s monopoly power?
- Monopoly power = higher prices and lower output compared to competitive conditions
- Protects consumers
CMA?
- UK gov. department responsible for promoting competition and preventing anti-competitive practices (e.g. collusion and predatory pricing)
Competition and Markets Authority
Surrogate competition?
- When an industry has a high degree of market concentration, gov. regulates these industries to replicate competition (i.e. a need to maintain high quality)
e.g. OFCOM, FCA, ORR, OFGEM, OFWAT
Price regulation?
- Used to regulate natural monopolies in the UK
- Aim is to bring price closer to allocatively efficient P = MC
Esp. important for essentials e.g. utilities so they are affordable
What are the two forms of price regulation?
- RPI - X
- RPI + X
How does RPI - X work?
- X is expected efficiency gains
- Regulator investigates costs of firms in industry to find X
- RPI - X is the maximum price rise in the industry
- Lowers prices –> so incentivises increased efficiency
Disadvantages of RPI - X?
- Accurately setting X is difficult (requires time, information and a number of competent staff)
- If X too low = less incentive for efficiency gains
- If X too high = firms less likely to make profit = some will leave the market
Profit regulation?
- Setting limits on the amount of profit a firm can make
e.g. rate of return regulation
Rate of return regulation?
Why?
- Allows firms to cover costs and earn a return based on amount of capital they use
- More capital = higher amount of profit earned
To incentivise investment = productivity gains = essential for utilities
Advantages of rate of return regulation?
- Firms are incentivised to increase capital investment = important for maintainance and improving quality
Disadvantages of rate of return regulation?
- Little pressure for firms to be productively efficient as costs guaranteed to be covered
- Firms may overload on capital invesrment
Performance targets?
- Used to regulate monopolies + incentivise improvements in public organisations e.g. schools, hospitals, police
Quality standards?
- Minimum standards of service a regulator requires a monopolist/public body to meet
e.g. A&E given 4hrs to treat/discharge/admit/transfer a patient
Advantages of performance targets and quality standards?
- Acts as a surrogate for competition
Disadvantages of performance targets and quality standards?
- Without sufficient sanctions = firms may be unmotivated to meet targets/standards
- Risk of gaming the system (e.g. surgeon avoiding difficult surgery to have high success rate)
- Unintended consequences - (e.g. police officer spending more time completing paperwork than protecting the public)
When would a CMA investigate a merger?
If EITHER conditions are met:
* Combined firm would have market share >25%
* Combined firm would have a turnover >£70m
What conditions are necessary for effective merger control?
- Competent regulators
- Accurate and up-to-date information
- Sufficienct time to thoroughly investigate
How does RPI + K work?
- Used by OFWAT to regulate water industry
- K is capital investment, RPI + K = price cap
- Incentivises capital investment = better maintenance and higher quality
SME?
- Small and medium enterprise
Start-ups?
- A company initiated by an entrepreneur to develop a scaleable business model
Why do most govs seek to support SMEs and start-ups?
- If gov makes it easier for entrepreneurs to set up businesses/existing ones to grow = ↑ number of firms challenging established firms = consumers benefit from ↑choice and ↑quality
Benefits that SMEs and start-ups bring
- ↑ competition
- ↑ jobs
- ↑ choice
- Source of exports
- ↑ innovation
- May be more flexible and quick in responding to changes in market conditions/customer wants and needs (larger firms take longer - hierarchy to go through)
Problems that SMEs and start-ups face
- Credit - banks view as greater risk
- Business skills - some may have lack of skills/experience
- Recruitment - finding competent staff difficult even for large firms
What can gov do to support SMEs and start-ups?
- Provide info on how to set up a business
- Deregulate to make it easier to enter markets
- Streamline the process for setting up and running a business
- Provide training to ↑ business skills
- Educational reform to ↑ skills of overall workforce
- Provide business mentoring services
Competitive tendering?
- Process in which private-sector firms compete to win contracts to perform tasks on behalf of the gov.
e.g. school catering, hospital construction
Introduces profit-motive to economic activity previously done by state = ↑ efficiency and quality
Benefits of competitive tendering?
- Private sector will be responsible for allocating more resources in the economy = market forces improve quality and choice = lower prices = taxpayer benefits
Downsides of competitive tendering?
- If gov heavily focussed on price = firms may reduce quality to win
- Firms have high bargaining power due to large size and experience = taxpayer may end up with poor value for money
- Contracts from UK gov only have a few bidders = limited competition
Privatisation?
- When a whole industry changes from being run by the public sector to the private sector
e.g. rail, water, energy in UK
Change enacted by gov.
How can privatisation increase efficiency?
-
Profit-motive and competition = firms will seek to reduce costs and ↑ quality to ↑ profit
∴ = ↑ efficiency
Disadvantages of privatisation?
- Poor regulation/natural monopoly conditions = little benefit for consumer - e.g. inflation price rises in rail and energy markets
- Social costs and benefits likely to be ignored - e.g. closure of rural transport networks = reduced connectivity
- Gov. loses out on source of revenue - public assets sold too cheaply asw. - e.g. Royal Mail
Advantages of privatisation?
- Stronger incentive to cut costs and be more efficient and ↑ productivity
- Gov gains from revenue from sale of assets
- If state monpoly replaced by several firms = ↑ competition = ↓ prices and ↑ quality
PFI?
- Private Finance Initiative
- Gov. takes competitive bids then buys whole investment project, then pays back the costs over a set period of time
Advantages of PFI?
- Efficiency
- Extra investment - gets private sector funds that gov wouldn’t be able to finance = can kickstart more projects
- Delivery - private sector not paid until asset delivered
- Dynamic efficiency
Disadvantages of PFI?
- Debt costs
- Inflexibility/poor value for money
- Risk
- Admin costs
- Dependence
Difference between competitive tendering and PFI?
CT = independent firms bidding for projects
vs
PFI = private company handles up-front costs and leases project to gov.
Deregulation?
- Removal of government regulations
UK: Financial market, public transport, postal services
Aim of deregulation?
- Reduces barriers to entry and exit = market more contestable = more firms in market = increased competition
Advantages of deregulation?
- ↑ contestability = ↑ quality, ↑ innovation and ↓ price
Disadvantages of deregulation?
- Market stability - can lead firms to take excessive risks = financial market failure
- Public safety - e.g. Grenfell Tower
What can regulators do to protect suppliers?
- Fines + jail sentences- to discourgae buyers from exploitative practises e.g. delaying payments
- ↑ Contestability (on buyer side e.g. supermarkets) - reduce monopsony power of buyers
- Minimum prices - counteracts monopsony bargaining power
What can regulators do to protect workers?
- Minimum wage
- Legislation to improve working conditions
- Fines + jail sentences - for employers who break labour laws
Counters monopsony powers of employers
Regulatory capture?
- Regulatory agencies may be dominated by industries they are regulating = agency acts in way that benefits industry instead of public
Regulatory capture causes?
- Bribery
- Familiarality
- Revolving door - regulators often go on to work for companies they previously regulated and get paid large salaries e.g. George Osborn on £800K at Blackrock
Regulatory capture impacts?
- ↓ Quality
- ↑ Price - e.g. if RPI+X set higher - (regressive effect, will impact lower income households the most)
- External costs ignored
- Asymmetric information
