3.6 Government Intervention Flashcards
What are the four roles of the CMA?
Investigate mergers
Promote competition (Controlling monopolies)
Protect consumer rights
Criminally charge those who are involved in cartels
What three things can the CMA do?
Impose financial penalties
Prevent mergers from happening
Make firms reverse actions they’ve already taken
When would the CMA investigate a merger?
If combined market share was over 25% or combines turnover would be over 70 million
Examples of mergers being allowed and disallowed?
Tesco and Booker was approved by the CMA but Ryanair and Aerolingus was rejected by the European commission
How can the CMA control monopolies and promote competition?
Quality Standards
Price Regulation
Profit Regulation
Performance Targets
How can the CMA use price regulation?
They can use the RPI-X formula to tell firms where to set prices below their profit maximizing equilibrium, which means all expected efficiency gains must be passed onto the consumer, used in the airline industry, but also RPI-X+K which allows for investment, which is commonly used in the water industry. It means firms are incentivised to be as efficient as possible
What is a disadvantage of using price regulation?
It is hard to know what X is as this information must come from firms so there could be asymmetric information, meaning firms lie so they can charge higher prices.
What is profit regulation?
This is used in the USA where prices are determined by how much capital firms employ also known as ‘rate of return regualtion’. This means that if firms employ more capital, they have higher costs so they can charge higher prices to maintain profit margins
What are the disadvantages of profit regulation?
Firms may employ more capital that they do not use to be able to charge higher prices. There is no incentive to be efficient with the capital that firms do have.
What are ways governments can promote competition and contestability?
Promote small businesses
Deregulation
Competitive tendering and PFI
What is the difference between competitive tendering and PFI schemes?
Competitive tendering is when government offer out contracts to private firms to provide the goods for public goods and services but PFI is used for firms to provide the service itself
What are ways governments can protect workers and suppliers?
Workers rights
Restricting monopsony power
What is privatization?
This is when government equity in a previously nationalized industry is sold off to private investors
What is nationalization?
This is when government buys major equity in a previously private sector firm or industry so that the government controls, owns and manages it
What are the 5 advantages of privatization?
The industry as a whole is more efficient
It reduces PSNCR (public sector net cash flow requirement) both long term and short term
It puts utilities into the hands of the population as people can buy shares in the companies
Managers are held more accountable as their losses won’t be covered by the government
Firms can invest with more certainty as there won’t be a new government every 5 years
What are the 4 disadvantages of privatization?
It causes a rise in PSNCR as firms can be undervalued and the profit from the firms will not received
It can disregard externalities
Natural monopolies would be better under state control
Some industries are important to not be exploited as they directly affect others such as gas electricity and water
What are the 4 advantages of nationalization?
A minimum quality of service will be provided
Natural monopolies will be managed well
Externalities will be considered
Long term investment is needed, which private shareholder may not be able to provide but governments can
What are the 3 disadvantages of nationalization?
There is likely to be the principle agent problem and moral hazard
There is likely to be X-ineffciiency
There may be political influence in decision making
Why should and shouldn’t natural monopolies be controlled by the government?
Governments will produce when there is allocative effficiency to maximize social welfare but firms will produce at profit max. This means when governments have control, they will produce at a lower price and higher output but they will incur losses so they will have to cover this.
What are the limits to government intervention?
Regulatory Capture
Asymmetric Information
What is regulatory capture?
When regulators are more lenient towards the industries they’re supposed to be regulating as they form connections with those inside the industry
