3.6 - Government Intervention Flashcards
1
Q
What are the main roles of the CMA (and other regulators)?
A
- Monitor & regulate prices - aim to ensure that companies don’t exploit their monopoly power by charging excessive prices
- Set standards of customer service - Companies that fail to meet specified service standards can be fined
- Open up markets - encourage competition by lowering barriers to entry - e.g. forcing the dominant firm in the industry to allow others to use its infrastructure network
- Act as the ‘Surrogate Competitor’ - regulation can act as a form of surrogate competition – attempting to ensure that prices, profits & service quality are similar to what could be achieved in competitive markets
2
Q
Give examples of other regulators?
A
- OFWAT: Water monopolies
- FCA: Financial Conduct Authority
- OFGEM: General energy markets
- OFCOM: Telecoms & broadcasting
- ORR: Rail regulator
3
Q
How is government intervention used to control mergers?
A
- CMA can monitor merger activity by preventing any firm gaining more than 25% market share
- If CMA has concerns they have the authority to stop it, or they can allow it to go ahead & force them to sell some of its assets
4
Q
Include a real world example of a merger blocked by the CMA?
A
- In 2019, the CMA blocked the proposed merger between Sainsbury’s & Asda
- CMA concluded that the merger would lead to increased prices and & reduced quality for consumers
- The decision was based on an extensive investigation that included surveys, economic analysis, & consultations with stakeholders
5
Q
What are the arguments for the government to intervene to control mergers?
A
- Protect jobs: potential restructuring, moving abroad, outsourcing, closing UK plants
- Protect consumers: exploitation (monopoly power), greater choice
- Economic environment: protect jobs, GDP, support UK owned industries
6
Q
What are the arguments against the government controlling mergers
A
- Competitiveness - survival of the fittest
- FDI - creates jobs
- Strategic industries e.g. defense, US banning tiktok
- Can other countries do a better job
7
Q
What are the types of regulation the CMA uses to regulate firms?
A
- Merger policy: blocking mergers that may give firms too much market power
- Price regulation: capping prices firms can charge consumers
- Profit regulation: taxing firms 100% on any SNP made above a certain limit
- Performance targets & quality standards: imposing targets & standards so firms don’t provide dodgy G&S
8
Q
How and when does the CMA use merger policy to regulate firms?
A
- CMA investigates merger if:
1. Combined market share is over 25%
2. Combined annual turnover over £70million - Only block mergers if they will negatively affect consumers
9
Q
Give 3 real-world examples of when the CMA used merger policy?
A
- When Three tried to acquire O2 - if they merged they would have had a combined market share of 31% -> blocked
- The speculated Virgin active & David Lloyd’s merger - they would have had a combined annual turnover of £1011million (2016) -> placed under investigation
- Orange & T-mobile merged -> EE despite having 33% marker share - merger was allowed as increased size of firm -> EoS -> improve quality of network coverage
10
Q
What are the two types of price regulation?
A
- RPI-X
- RPI+K
11
Q
What are the limitations of price regulation?
A
- It’s difficult to know where to set X or K
- Due to asymmetric info, they don’t know the allocative efficient output
- Efficiency gains may come from somewhere else -> quality falls
- Different markets have different rates of inflation so using it for the whole economy -> misallocation of resources
12
Q
What is RPI-X?
A
- RPI-X: a tool by the government to control/regulate the price that monopolies charge
- ‘X’ represents expected efficiency gains
- Firms must make efficiency gains in the SR to reduce costs & keep making SNP
13
Q
What is RPI+K?
A
- RPI+K: alternative to RPI-X
- Can increase price with inflation + k% -> extra SNP can be invested into better capital
- K represents investment & factors in the potential for dynamic efficiency in the industry
- Ensures gains are passed to consumers
14
Q
What is regulatory capture?
A
Regulatory capture is when a regulator begins to favour the company they’re regulating
- Removes impartiality & weakens ability to regulate
15
Q
Give examples of regulatory capture in the UK?
A
- Setting K too high in RPI+K: increases firms price cap -> increase prices more than needed -> more profits
- Setting X too low in RPI-X: allows firms to increase prices by more than they should
- Setting extremely low quality standards: firms can get away with selling cheaper quality products -> more profits - negatively affects consumers
16
Q
Give 2 real world examples of regulatory capture?
A
- BP ended up with free permits to drill for oil in the Mexican Gulf after American regulators were charmed by staff -> oil spill (2010)
- Alleged capture of HMRC by Vodafone who negotiated a tax reduction from £7bn to £1bn (2009-10)
17
Q
How do regulators use profit regulation?
A
- Firms are taxed on SNP by the government 100% above a certain limit
- Firms must re-invest extra profits to avoid tax on profits above profit cap -> encourages investment & discourages raising of prices
18
Q
Give a real world example of profit regulation?
A
- Windfall tax: one-off tax payment to the government on a firms’ profits
- Example: Blair placed a windfall tax on private utilities in 1997 -> raised £5bn
- Eval: managers may hide profits
19
Q
What are the problems of using profit regulation?
A
- Ineffective: reduces profit incentive -> lazy -> inefficient -> costs spiral
- Requires sufficient knowledge to set an appropriate benchmark
20
Q
What are performance targets?
A
Targets for firms to meet to ensure they’re providing a top quality service
21
Q
Give 2 real world examples of performance targets?
A
- Scotrail has the performance target of 91.3% of its trains on time (fined if it falls below)
- NHS has target of responding to A&E patients in 4 hours
22
Q
What are quality standards?
A
Standards of quality firms have to meet to sell their G&S
23
Q
Give 2 real-world examples of quality standards
A
- BSI (British standards institute): sets standards on toys to ensure they’re safe
- FSA (Foods Standards Association): for food quality & safety
24
Q
What are the 4 ways of promoting contestability?
A
- Deregulation
- Privatisation
- Helping small businesses
- Stopping anti-competitive practices
25
How does deregulation promote contestability?
Give real world example.
- Removing regulation to reduce barriers to entry
- e.g. American airlines industry - regulators only allowed a few airlines to take certain routes in the 70s - Airlines Deregulation Act removed these -> encouraged new entrants to enter & compete w/ incumbent firms -> lower prices & better customer service & efficiency
- EU taxi driver market - removed required geography test + 50,000 taxi drivers enter through Uber's app
26
How does privatisation promote contestablity?
- When the gov transfers ownership of a public sector firm -> private sector
- e.g. Thatcher privatised BT in 1980 -> investors put pressure on BT to cut cost & maximise profits -> increased efficiency
- Other examples: British Gas, British Airways (previously the only firms legally producing these services)
- Privatisation -> deregulation e.g. now ryanair & easyjet compete with BA
27
What are the advantages of privatisation?
- Encourages greater competition -> reduces x-inefficency (minimise costs) & ensures low prices & high quality as firms realise they need to be competitive
- Increased allocative efficiency - more competion + greater efficiency drive - firms will strive to prodcue goods consumer want at high quality
- Efficiency incentive drives dynamic efficiency
- 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 Gov & they no longer have to cover any of the firm’s losses
- It reduces government interference & means that firms can invest with greater certainty, instead of worrying about change when a government is elected every 5 years
- An ideological argument is that it puts utilities into the hands of the people since they can own shares + Workers will be more motivated as they know their hard-work will be rewarded by high dividends
28
What are the disadvantages of privatisation?
- Limited competition -> productive (don't need to minimise costs) & allocative inefficiency (don't need to strive to have high quality)
- When there are natural monopolies it may be fairer for the government to own the firm since they won’t abuse their monopoly position
- Profit motive -> firms won't want to make loss-making goods even if they're socially desirable
- Loss of state-run natural monopoly & loss of EoS (opening up market to huge competition + each inividual firm can't produce as much) -> productive ineffiency
29
What does success of privatisation depend on?
- Level of competition post-privatisation e.g. existence of monopolies
- Level of gov regulation e.g. strict regulation on producing socially desirable G&S, firms forced to account for external cotsts
30
What are the 3 ways of helping small businesses? (promoting contestability)
1. Access to loans e.g. Enterprise Capital Fund
2. R&D Tax Breaks
3. Subsidies
31
Give 2 real world examples of where small businesses are given access to loans.
- The ECP have £400m to lend out to new firms at low interest rates to help them expand & enjoy EoS -> increased contestability -> lower prices
- UK Gov gave £5000 to small businesses for cyber security to help them compete with old school incumbent rivals
32
What is competitive tendering? Why is it done?
- The government/public sector will outsource specific jobs to private firms e.g. NHS hospital catering, railway building contracts
- If the private sector had full control -> price rises
- Outsources catering jobs it needs help with - writes up a contract & puts it up for bidding (competitive tendering) -> chooses which bid offers best value for money
33
What are the 2 government intervention methods to protect suppliers & employees?
- Nationalisation
- Restriction of monopsony power
34
What is nationalisation and when does it occur?
- When the private sector transfers ownership of a private sector firm to the government
- Private sector firms end up raising prices too much & cutting quality to maximise SNP
35
Give a real world example of nationalisation.
- Labour Gov (1948) decided private railway firms were charging too high prices & trains were regularly delayed
- Nationalised -> British Rail - Natural Monopoly (high sunk costs & huge EoS)
- Price of train tickets set to AR=MC
- Making a loss at this price -> paid for with tax money
36
What are the advantages of nationalisation?
- Greater economies of scale -> productive efficiency -> lower AC -> lower prices
- More focus on service provision - Gov always look to maximise social welfare at a low price that maximises consumer surplus -> allocative efficiency
- Less likely to be market failures arising from externalities -> Gov consider the full social cost/benefit when producing -> output at socially optimal level -> AR=MC
- Public sector can be a vehicle for macro-economic control e.g. control employment levels to keep it low during a recession
37
What are the disadvantages of nationalisation?
- Diseconomies of scale -> public sector dominating a huge industry -> problems of coordination, motivation etc -> rise in AC -> loss of productive efficiency -> high prices
- Lack of incentive to minimise costs & a risk of complacency & wasteful production -> x-inefficiency due to lack of profit motive
- Lack of profit motive -> lower SNP -> lower dynamic efficiency - private firms more likely to engage in investment + innovation
- Highly expensive & a burden on the tax-payer e.g. when budget deficits are high
- Higher prices due to lack of competition -> lower quantities -> may see monopoly outcomes -> allocative efficiency
- Greater risk of moral hazard -> politicians make risky decisions e.g. a big investment -> taxpayers bear the burden
- Political priorities override commercial issues
38
What are limits to government intervention?
- Asymmetric information
- Regulatory capture
39
How is asymmetric information a limit to government intervention?
- Regulators have to use information provided to them by industries when setting price targets etc
- It's in industries best interest to maximise profits - may provide inaccurate info -> regulators are unable to set correct targets, prices etc
- Gov failure may result if regulation e.g. RPI-X or quality standards aren't correctly set
40
What does the success of nationalisation depend on?
- Role of regulation
- Competition in private sector
- Size & objective of private sector firms
- Funding vs delivery of key public services
