3.6 Government intervention Flashcards
CMA
Competition and Markets Authority work to promote competition for the benefit of consumers and investigate mergers and breaches of UK and EU competition law
Enforce consumer law protection law and bring criminal cases against individuals who participate in cartels
Impose financial penalties, prevent mergers taking place and force businesses to reverse actions already taken
Controlling mergers
UK - mergers are assessed in specific circumstances of each case considering whether there will be a substantial lessening of competition (SLC)
Merger will be approved if potential benefits outweigh costs
Merger is investigated if the result is market share greater than 25% or if it meets turnover of £70 million or more
Aim of controlling mergers
Prevent two large firms merging so they do not exploit their customers by raising prices, offering poorer quality service and reducing choice
Can prevent firms from gaining monopoly power
Eval of controlling mergers
Very few mergers are investigated each year
CMA can suffer from regulatory capture and may not have all the info necessary to make a decision
Price regulation
Method of controlling monopoly
Regulators can set price controls to force monopolies to charge a price below profit maximising price, using the RPI-X formula
X represents the expected efficiency gain of the firms and aim is to ensure that firms pass on their efficiency gains to consumers
Used in airport industry
Gives incentive for firms to be as efficient as possible as if they can lower costs by more than X they will enjoy increased profits
Prevents excessive prices and ensures that gains are passed onto the consumer
RPI-X+K
Better system than RPI-X where k represents the level of investment
Eval of price regulation
Difficult to know where to set X due to rapid improvement in tech and because info on what the efficiency gain will be have to come from firm who could easily lie (asymmetric info)
As. result, there may be sudden price falls or rebate for customers
Maximum prices could be set where price is equal to the MSC, ensuring monopolies are allocative efficient. However it is difficult for governments to know exactly where to set the price as they do not know exact allocative efficient output
Can also increase dynamic inefficiency as firms are unable to maximise profit so may not invest
Profit regulation
USA - rate of return regulation is used where prices are set to allow coverage of operating costs and to earn fair rate of return on capital invested, based on typical rates of return in competitive market
Aims to encouraged investment and prevents firms from setting high prices
Profit regulation eval
gives firms incentive to employ too much capital in order to increase profits
Criticised since a reduction in costs will not improve firms situation and so there is little incentive to be efficient
As with RPI-X regulators need sufficient knowledge of industry and so will suffer from asymmetric info
Quality standards
Monopolists will only produce high quality goods if this is the best way to maximise profits
Gov can introduce quality standards, which will ensure that firms do not exploit their customers by offering poor quality
Problem is it requires political will and understanding
Performance targets
Regulators can introduce yardstick competition, such as setting punctuality targets for train operating companies
Also possible to split up a service into regional sectors to compare the performance of one region against another (used in water industry)
Could set targets over price, quality, consumer choice and costs of production
Will help firms improve their services and lead to gains for customers
Performance targets eval
Firms will resist introduction of targets so again it requires political will and understanding
Will also attempt to find ways to meet targets without actually improving
Other firms will fail to meet their performance targets and so they will be no improvements
Gov needs to ensure that fines and other deterrents are strong enough that firms at least work to ensure targets are met
Promotion of small businesses
Promotes competition and contest ability
Gov can give training and grants to new entrepreneurs and encourage small businesses through tax incentives or subsidies
Will increase comp since there will be more firms within the market and will offer chance for more firms to join
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
Deregulation eval
Poor business behaviour
Licenses for specific industries are necessary to ensure standards are upheld
some have argued that the deregulation of financial markets was a major contributor to the financial crisis in 2008
Competitive tendering
Gov has to provide certain goods and services because they are merit or public goods but this does not mean that the state has to be producer of these
Goods are produced by the private sector and then bought by the public sector
A similar thing can be done with services - gov can contract out the provision of a good or service to private companies
Competition can be introduced into the market as the government will request competitive tenders by drawing up a specification for g+s and inviting private firms to bid for the contract to deliver it
Firm offering lowest price wins the contract, subject to quality guarantees
Helps minimise costs for gov and ensures efficiency by allowing more comp into market
Private sector will have more experience running the projects so it is likely to be better managed
Deregulation
Removal of legal barriers to entry to a previously protected market to allow private enterprises to compete
Will increase efficiency in the market by allowing greater competition as more firms can enter and conduct more activities than they could before
Competitive tendering eval
Process of collecting bids is costly and time consuming
Private sector may not aim to maximise social welfare in the same way the gov would and could use cost cutting methods that reduce quality
Important that they prevent firms undertaking anti-competitive practices such as collusion and predatory pricing
The problem is that it is very difficult to prove overt collusion and almost impossible to prove tacit collusion
Privatisation
The sale of government equity in nationalised industries or other firms to private investors
Aims to revitalise inefficient industries and can sometimes lead to higher prices and poor service
Adv privatisation
Encourages greater comp, which reduces X-inefficiency and ensures low prices and high quality as firms realise they need to be competitive
Managers become more accountable since poor performance will mean a fall in share prices and or shareholders wanting them replaced
Can reduce public sector net cash requirement (PSNCR) st and lt as initial sale of shares raises revenue for gov and they no longe have to cover firms losses
Reduces government interference which some see as benefit in itself
Firms can invest with greater certainty instead of worrying about change when Govs change
Puts utilities into hands of the people since they can own shares
Workers will be more motivated as they know hard work will be rewarded with high dividends
Privatisation eval
May be better for government to own firms since they won’t abuse monopoly power
some argue that industries such as electricity, water and transport are important because they directly affect the success of other industries and therefore it makes sense for government to own them in order to coordinate properly
Problems over externalitIes and inequality
Negatively affects that the PSNCR as firms are underpriced when they are sold and gov no longer receives a firms profit
Restrictions on monopsony power
Protecting suppliers and employees
Monopsonists are able to exploit suppliers by reducing prices
Gov can prevent these by passing anitmonopsony 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 to ensure suppliers are paid fair amount
Self regulation can be used but this is weak
Workers rights
Gov protects employees through health and safety laws, employment contracts, redundancy processes, maximum hours at work and the right to be in a trade union
Gov can also encouraged firms to draw up codes of conduct relating to employment practice
Problem is that if workers rights are too strong, employers will be unwilling to take on new workers due to extra cost of emptying these workers
Nationalisation
When a private sector company or industry is brought under the state control, to be own and managed by the government
Nationalisation adv
Investment is needed for long term but in private firm investment is only short term as shareholders will see no benefit for long term investment - poor quality of service
In case of 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 profit
Gov will consider externalities
Gov will guarantee minimum level of service for people who suffer the risk of being cut off from the service due to lack of potential profit for providing or them
Dangerous to allow key strategic industries to fall into private hands as this could have disastrous effects for the country
