3.6 Government Intervention Flashcards
LS16-18
1
Q
Why would gov. intervene when there’s monopoly power?
A
- Monopoly power = higher prices and lower output compared to competitive conditions
- Protects consumers
2
Q
CMA?
A
- UK gov. department responsible for promoting competition and preventing anti-competitive practices (e.g. collusion and predatory pricing)
Competition and Markets Authority
3
Q
Surrogate competition?
A
- 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
4
Q
Price regulation?
A
- 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
5
Q
What are the two forms of price regulation?
A
- RPI - X
- RPI + X
6
Q
How does RPI - X work?
A
- 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
7
Q
Disadvantages of RPI - X?
A
- 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
8
Q
Profit regulation?
A
- Setting limits on the amount of profit a firm can make
e.g. rate of return regulation
9
Q
Rate of return regulation?
Why?
A
- 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
10
Q
Advantages of rate of return regulation?
A
- Firms are incentivised to increase capital investment = important for maintainance and improving quality
11
Q
Disadvantages of rate of return regulation?
A
- Little pressure for firms to be productively efficient as costs guaranteed to be covered
- Firms may overload on capital investment
12
Q
Performance targets?
A
- Used to regulate monopolies + incentivise improvements in public organisations e.g. schools, hospitals, police
13
Q
Quality standards?
A
- 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
14
Q
Advantages of performance targets and quality standards?
A
- Acts as a surrogate for competition
15
Q
Disadvantages of performance targets and quality standards?
A
- 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)
16
Q
When would a CMA investigate a merger?
A
If EITHER conditions are met:
* Combined firm would have market share >25%
* Combined firm would have a turnover >£70m
17
Q
What conditions are necessary for effective merger control?
A
- Competent regulators
- Accurate and up-to-date information
- Sufficienct time to thoroughly investigate
18
Q
How does RPI + K work?
A
- Used by OFWAT to regulate water industry
- K is capital investment, RPI + K = price cap
- Incentivises capital investment = better maintenance and higher quality
19
Q
SME?
A
- Small and medium enterprise
20
Q
Start-ups?
A
- A company initiated by an entrepreneur to develop a scaleable business model
21
Q
Why do most govs seek to support SMEs and start-ups?
A
- 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
22
Q
Benefits that SMEs and start-ups bring
A
- ↑ 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)
23
Q
Problems that SMEs and start-ups face
A
- Credit - banks view as greater risk
- Business skills - some may have lack of skills/experience
- Recruitment - finding competent staff difficult even for large firms
24
Q
What can gov do to support SMEs and start-ups?
A
- 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
25
**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
## Footnote
Introduces profit-motive to economic activity previously done by state = ↑ efficiency and quality
26
**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**
27
**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**
28
**Privatisation?**
* When a whole industry changes from being run by the **public sector to the private sector**
| e.g. rail, water, energy in UK
## Footnote
Change enacted by gov.
29
How can **privatisation increase efficiency?**
* **Profit-motive** and **competition** = firms will seek to **reduce costs** and ↑ **quality** to ↑ **profit**
∴ = ↑ efficiency
30
**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
31
**Advantages** of privatisation?
* **Stronger incentive to cut costs** and be more efficient and ↑ productivity
* Gov gains from **revenue from sale** of assets
* If state monopoly replaced by several firms = ↑ competition = ↓ prices and ↑ quality
32
**PFI?**
* Private Finance Initiative
* Gov. takes competitive bids then buys whole investment project, then **pays back the costs over a set period of time**
33
**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**
34
**Disadvantages** of PFI?
* Debt costs
* Inflexibility/poor value for money
* Risk
* Admin costs
* Dependence
35
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.
36
**Deregulation?**
* Removal of government regulations
## Footnote
UK: Financial market, public transport, postal services
37
**Aim** of deregulation?
* **Reduces barriers** to entry and exit = market **more contestable** = more firms in market = increased **competition**
38
**Advantages** of deregulation?
* ↑ contestability = **↑ quality, ↑ innovation and ↓ price**
39
**Disadvantages** of deregulation?
* Market stability - can lead firms to take excessive risks = **financial market failure**
* **Public safety** - e.g. Grenfell Tower
40
What can regulators do to **protect suppliers?**
* **Fines + jail sentences**- to discourage 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
41
What can regulators do to **protect workers?**
* **Minimum wage**
* **Legislation** to improve working conditions
* **Fines + jail sentences** - for employers who break labour laws
## Footnote
Counters monopsony powers of employers
42
**Regulatory capture?**
* Regulatory agencies may be **dominated by industries** they are regulating = agency acts in way that benefits industry instead of public
43
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
44
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**
