3.6 government intervention Flashcards
What does the CMA do
Work to promote competition for the benefit of consumers and investigate mergers and breaches of uk and Eu competition law, enforce consumer protection law and bring criminal cases against individuals who participate in cartels.
when will a merger be investigated
A merger is investigated if it will result in market share greater than 25% or if it meets
the turnover test of a combined turnover of £70 million or more.
what’s the aim of preventing two large companies merging
The aim of preventing two large companies merging is so they do not exploit their customers by raising price, offering poorer quality service and reducing choice. It
can prevent firms from gaining monopoly power.
what is the problem with the CMA.
However, the problem is that very few mergers are investigated each year. The
CMA can suffer from regulatory capture and may not have all the information
necessary to make a decision.
why is it argued that monopolies need to be controlled
Monopolies are allocative and productively inefficient and so it can be argued that they need to be controlled. Most of this
regulation occurs for utilities, which are natural monopoles.
price regulation - controlling monopolies
Regulators can set price controls to force monopolists to charge a price below profit
maximising price, using the RPI-X formula. X represents the expected efficiency gains of the firms and the aim is to ensure firms pass on their efficiency gains to
consumers. This is used in the airport industry.
maximum prices could be set where the price is equal to the MSC,
ensuring monopolies are allocative efficient. However, it is difficult for governments to know where they should set the price as they do not know the exact allocative
efficient output.
what is rate of return regulation
‘rate of return’ regulation is used where prices are set to allow coverage
of operating costs and to earn a ‘fair’ rate of return on capital invested, based on typical rates of return in a competitive market.
benefits of rate of return profit regulation
aims to encourage investment and prevents firms from setting high prices.
drawbacks of rate of return profit regulation
it gives firms an incentive to employ too much capital in order to increase
their profits.
It is also criticised since a reduction in costs will not improve the firm’s situation and so there is little incentive to be efficient .
what do quality standards ensure
example
ensure that firms
do not exploit their customers by offering poor quality.
For example, the Post Office has to deliver letters on a daily basis to all areas and electricity generators are forced to have enough capacity to prevent blackouts.
problem with quality standards
The problem is that it requires political will and understanding to introduce.
types of performance targets that could be set
They could set targets over price, quality, consumer choice and costs of production. It
will help firms to improve their service and lead to gains for customers.
problem of performance targets
The problem is that firms will resist the introduction of targets, so again it requires political will and understanding. They will also attempt to find ways to meet targets without actually improving , for example changing train timetables to prevent trains officially arriving late.
what’s a windfall tax
taxes imposed after the event has occurred, for example, after a monopolist has made extremely high profits. it can discourage monopolists from making excessive profits and encourage them to reinvest it.
what is breaking up the monopolist
eval too
government can split the monopolist up into competing units, which should lead to lower prices and profits and greater consumer choice.
however, can lead to loss of economies of scale and mean that prices could even rise.
‘self-regulation’ for monopolies
when monopolists come under threat of regulation, they tend to suggest that they should regulate themselves through codes of practice. this is beneficial to the government as it means they don’t have to pass legislation as the industry polices themselves.
how can the government promote small business in terms of promoting competition and contestibility.
The government can give training and grants to new entrepreneurs and
encourage small businesses through tax incentives or subsidies . This will increase
competition since there will be more firms within the market, and will offer a chance for more firms to join.
It increases innovation and efficiency , since new firms are likely to provide new products and incumbent firms will no longer be able to be X-inefficient.
government promotion of competition and contestability through deregulation
This is the removal of legal barriers to entry to a previously protected market to allow private enterprises to compete. This will increase efficiency in the market by
allowing greater competition as more firms can enter and conduct more activities than they could before.
promotion of competition and contestibility through competitive tendering
A similar thing can be done with services; the government can contract out the provision of a public good or service to private companies e.g. private firms could be
employed to run hospitals. These are called Private Finance Initiatives (PFI).
Competition can be introduced into the market as the government will request competitive tenders by drawing up a specification for the good or service and inviting
private firms to bid for the contract to deliver it
This helps to minimise costs for the government and ensures efficiency by
allowing for competition in the market. The private sector will have more experience running the projects, so it is likely they will be better managed.
evaluation for competitive tendering as a way to promote competition and contestibility
However, it may not always be the most cost effective way and the process of collecting bids is costly and time-consuming . The private sector may not aim to maximise social welfare in the same way the government would and could use cost-cutting methods that reduce quality
restricting monopsony power as a way to protect suppliers and employees
The government can
prevent these by passing anti-monopsony laws which make certain practices illegal and can introduce an independent regulator who will force monopsonists to buy
fairly.
Fines can be put in place for those who exploit their power and minimum prices may be introduced to ensure suppliers are paid a fair amount.
how does the governent protect workers
The government protects employees through health and safety laws, employment contracts, redundancy processes, maximum hours at work and the right to be
in a trade union. The government can also encourage firms to draw up codes of conduct relating to employment practice.
what is privatisation
Privatisation is the sale of government equity in nationalised industries or other firms to private investors. The aim is to revitalise inefficient industries but can sometimes lead to higher prices and poor services.
what is nationalisation
Nationalisation is when a private sector company or industry is brought under state control, to be owned and managed by the government.
advantages of privatisation
It encourages greater competition, which reduces X-inefficiency and ensures low prices and high quality as firms realise they need to be competitive.
Managers become more accountable, since they know poor performance will mean a fall in share prices and/or shareholders wanting them to be replaced.
In both the long and short run, it can reduce the public sector net cash
requirement (PSNCR) as the initial sale of shares raises revenue for the government and they no longer have to cover any of the firm’s losses.
It reduces government interference which some see as a benefit in itself. This also means that firms can invest with greater certainty , instead of worrying about change when a government is elected every 5 years.
disadvantages of privatisation
when there are natural monopolies it may be fairer for the government to own the firm since they won’t abuse their monopoly position.
Some people argue that industries such as electricity, water and transport are important because they directly affect the success of other industries, and so
therefore it makes more sense for the government to own them in order to coordinate them properly.
problems over externalities and inequalities.
some argue it negatively effects the PSNCR as firms are under priced when they are sold and the government no longer receives a firms profit.
example of privatisation
Between 1994 and 1997, the railway industry was privatised.
advantages of nationalisation
Investment is needed for the long term , but in a private company investment is only short term as shareholders will see no benefit from long term investment. This
may lead to a poor quality of service.
In the case of a natural monopoly, it is better for monopoly to be run by the state as they aim to maximise social welfare rather than a private business who will maximise profits
government will consider externalities.
disadvantages of nationalisation
Some say it would be dangerous to allow key strategic industries to fall into private hands as this could have disastrous effects for the country.
nationalised industries suffer from the principal-agent problem and moral hazard, as managers know that any loss they make will be covered by the government.
They will experience X-inefficiency and this could cause higher prices for
consumers, especially since the industry will become a monopoly.e
examples of nationalisatio
Post WWII brought high levels of nationalisation and this is known as the ‘golden age, a period of high growth before a period of stagflation that led to privatisation of these same industries. It became apparent that they suffered from high losses and were X-inefficient
NHS.
impacts of government intervention
Governments are able to prevent monopolies charging excessive prices and aim to limit their profit.
They can increase efficiency in a market by increasing competition and
contestability
If the government runs a business, in theory, they should reduce prices and
increase quality as they aim to benefit consumers.
A public sector business is likely to be allocative efficient, as they aim to maximise social welfare.
what is regulatory capture
This occurs when the regulator is captured by the firm/industry they are regulating. The fact that the regulator will often meet with the firm’s employees will mean they
become more empathetic and able to ‘see things from their perspective’ , which will remove impartiality and weakens their ability to regulate
this is an example of government failure.
whats asymmetric information
This is where regulatory bodies have to use information provided to them by the industries when setting price targets etc. It is in the industry’s best interest to maximise their profits and so may provide inaccurate or limited information, meaning regulators are unable to set correct targets, prices etc.
result of asymmetric information
As a result, government failure may occur if regulation such as RPI-X or quality standards are not set correctly. The government will be unable to regulate the companies accurately.
