3.6.1 Government Intervention Flashcards
What are the 4 main ways in which governments can control monopolies?
- profit regulation
- price regulation
- quality standards
- performance standards
Where does the government set a maximum price to regulate the profit of monopolies?
At the alocatively efficient level, this is where MC = AR = D and is the socially optimum level
Explain the affects, using the diagram, on a maximum price on a monopoly?
MAX price sits where MC intersects AR = D. Allocatively efficient
Price would fall = increase in con sur…. decrease in pro sur
Supernormal profit would be gone = no dynamic efficiency
Output would increase, increase market share potentially
What are the problems with price regulation of monopolies?
- information gaps to put where max prices sits, a too high price may lead to shutdown points
- costly and time period to find where max price sits, opp cost
- no incentive to cut costs and increase profit as regulatory body will just increase price
How do quality control and performance targets control monopolies?
Government sets targets for monopolised industries
Benefit consumer as choice, consumer experience is better
Detrimental to producer as costly to implement
Give an example of quality control and performance targets in rail industry?
Govt sets max times a train is suppose to be delayed daily
Give an example of when quality control and performace targets affect gas companies?
For pensioners, if they cannot afford gas and electricity, companies cannot cut their supply
What are the problems with quality controls and performance targets?
-unintended consequences, short cuts in services (NHS). Companies can gain system, for example trains can just simply say journey times are going to take longer
How do profit controls affect monopolies?
Regulatory bodies can simply limit the amount of profit a a monopolist can make. The body’s profit control will cover costs and also give a % return on capital investments
What are the problems with profit regulation?
- asymmetric information
- incentives to raise costs
- incentive to over employ capital
What are the 4 ways in which governments can improve competition and contestability?
- enhancing competition of small firms
- deregulation
- tendering of government contracts
- privatisation
How can governments enhancing competition of small firms improve competition and contestability?
The government can given subsidies to small businesses to train entrepreneurs, staff e.c.t This can be done through tax cuts and subsidies. Will increase competition as more firms will be in market, use contestable market diagram. Incumbent firms will have to become more efficient, X efficiency especially. May change business objective to compete.
What are the problems with enhancing small businesses to improve contestability?
Subsidy and tax cuts = opportunity cost
No guarantee subsidy will be used in the correct way
How can deregulation promote competition and contestability?
This is the removal of legal barriers to entry. This will increase efficiency in the market as more firms can enter the market, again benefiting consumer
What are the problems with deregulation to improve contestability?
Leads to poor business behaviour, for example deregulation of financial markets lead to global financial crash
How can competitive tendering of govt contracts improve competition and contestability?
The govt has to provide certain goods and services because they are merit or public goods. Govt can give the contracts to produce such items to the private sector to make. Govt gives contracts, firms that responds with lowest price, subject to quality guarantee wins, improving competition. Helps reduce cost for the government, ensures efficiency as it is a competitive market.
What are the problems with competitive tendering of government contracts to improve contestability?
Collecting and processing bids can be costly and time consuming, opportunity cost therefore. Politicians can give contracts to their mates as seen in COVID. Some firms may use cost cutting methods in order to increase margins, reducing quality
What is privatisation?
Process of bringing a state owned business into the private sector.
What diagram would one use to show the intention of privatisation on a market?
Cost, revenue, profit diagram which shows supernormal profit
What are the advantages of privatisation?
More efficient outcomes, allocative efficiency should increase. X efficiency should fall. Waste and cutting costs should drive dynamic efficiency in the long run
What are the disadvantages of privatisation?
- limited competitive outcomes. Firms can still price discriminate e.c.t.
- loss of natural monopolies which severely reduces economies of scale
What does privatisation depend on?
- level of competition post privatisation
- level of government regulation
What are the two ways in which government intervention can protect employees and suppliers?
- nationalisation
- restriction of monopsony power
How can a government restrict monopsony power to protect employees and suppliers?
Govt can pass laws to combat monopsonist. They can introduce an independent regulator who will force monopsonists to buy fairly. A minimum price can be introduced to suppliers to ensure monopsonist is paying correctly
What is nationalisation?
The process of bringing an industry under state control
What are the arguments in favour of nationalisation?
- greater economies of scale
- more focus on service provision
- less likely to be market failures from externalities
- long term outlook
What are the arguments against nationalisation?
- suffer from moral hazard problem as all costs are covered by government
- suffer from principal agent problem
- experience x inefficiency, causing higher prices for consumers
- influenced by government decisions and govt has an opportunity cost
