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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
Q

Competitive tendering?

A

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
Q

Benefits of competitive tendering?

A

Private sector will be responsible for allocating more resources in the economy = market forces improve quality and choice = lower prices = taxpayer benefits

27
Q

Downsides of competitive tendering?

A
  • 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
Q

Privatisation?

A

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
Q

How can privatisation increase efficiency?

A
  • Profit-motive and competition = firms will seek to reduce costs and ↑ quality to ↑ profit
    ∴ = ↑ efficiency
30
Q

Disadvantages of privatisation?

A
  • 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
Q

Advantages of privatisation?

A
  • 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
Q

PFI?

A

Private Finance Initiative

Gov. takes competitive bids then buys whole investment project, then pays back the costs over a set period of time

33
Q

Advantages of PFI?

A
  • 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
Q

Disadvantages of PFI?

A
  • Debt costs
  • Inflexibility/poor value for money
  • Risk
  • Admin costs
  • Dependence
35
Q

Difference between competitive tendering and PFI?

A

CT = independent firms bidding for projects
vs
PFI = private company handles up-front costs and leases project to gov.

36
Q

Deregulation?

A

Removal of government regulations
UK: Financial market, public transport, postal services

37
Q

Aim of deregulation?

A

Reduces barriers to entry and exit = market more contestable = more firms in market = increased competition

38
Q

Advantages of deregulation?

A

↑ contestability = ↑ quality, ↑ innovation and ↓ price

39
Q

Disadvantages of deregulation?

A

Market stability - can lead firms to take excessive risks = financial market failure

Public safety - e.g. Grenfell Tower

40
Q

What can regulators do to protect suppliers?

A
  • 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
Q

What can regulators do to protect workers?

A
  • Minimum wage
  • Legislation to improve working conditions
  • Fines + jail sentences - for employers who break labour laws

Counters monopsony powers of employers

42
Q

Regulatory capture?

A

Regulatory agencies may be dominated by industries they are regulating = agency acts in way that benefits industry instead of public

43
Q

Regulatory capture causes?

A
  • 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
Q

Regulatory capture impacts?

A
  • ↓ 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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