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Economics Theme 3 > 3.6 Government Intervention > Flashcards

3.6 Government Intervention Flashcards

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

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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

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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

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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

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5
Q

What are the two forms of price regulation?

A

RPI - X
RPI + X

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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
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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
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8
Q

Profit regulation?

A

Setting limits on the amount of profit a firm can make

e.g. rate of return regulation

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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

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10
Q

Advantages of rate of return regulation?

A

Firms are incentivised to increase capital investment = important for maintenance and improving quality

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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

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12
Q

Performance targets?

A

Used to regulate monopolies + incentivise improvements in public organisations e.g. schools, hospitals, police

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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

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14
Q

Advantages of performance targets and quality standards?

A

Acts as a surrogate for competition

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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)
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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

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17
Q

What conditions are necessary for effective merger control?

A
  • Competent regulators
  • Accurate and up-to-date information
  • Sufficient time to thoroughly investigate
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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 scalable business model

21
Q

Why do most gov 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 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 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 monpoly 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 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 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

Economics Theme 3 (15 decks)

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