3.6.1 Government intervention Flashcards
What markets are regulatory bodies commonly found in?
Monopoly or oligopoly markets.
These bodies have varying responsibilities, including regulating prices, monitoring safety and product standards and encouraging competition.
Examples of regulatory bodies in the UK
- OFWAT regulates the water industry.
- OFCOM regulates the communication industries.
- OFGEM regulates the gas and electricity markets.
What methods do regulatory bodies have to regulate firms?
- Price capping
- Rate of return (regulating profits)
- Performance targets (and fines)
Who are the CMA?
A UK government department, responsible for strengthening business competition and reducing anti-competitive behaviour.
Goals of the CMA
- Investigate mergers and anti-competitive behaviour.
- Increase the contestability of appropriate markets.
- Protects the interests of consumers and firms.
- Bring about criminal proceedings against colluding cartels.
- Encourage regulatory bodies to use their power.
What does the CMA look at?
- Mergers & acquisitions - they monitor mergers and takeovers so they can prevent those that aren’t beneficial to the efficiency of the market or to consumers. They may choose to stop a merger than would give a firm too high a market share (over 25%) and make it a monopoly, or that would give a firm too much monopoly power.
- Agreements between firms – often agreements between firms are anti-competitive and cause market inefficiency.
- The opening of markets to competition – when markets that were controlled by the government are opened up to competition. E.g. if a government-owned transport service is privatised, the government might want to ensure the existing firm is open to free market competition and doesn’t dominate the market as a private monopoly.
What can the CMA impose?
They can block mergers and impose fines on firms guilty of anti-competitive behaviour.
Evaluation of competition policy
The effectiveness of competition policy is affected by the information available to the European Commission or the CMA. The regulatory bodies decide whether behaviour in different markets is anti-competitive or unfair to the consumer based on the information they have.
If the information available to the government is reliable, then it should be able to intervene in the market in a way that will improve efficiency, allocate resources more efficiently and improve fairness to the consumer. If the information is imperfect, then it could lead to government failure.
Competition policy and its implementation (through regulation) have costs, but in general these costs are outweighed by the benefits. If the costs outweigh the benefits, this is an example of government failure.
Methods of government intervention used to improve competition
- Privatisation
- Nationalisation
- Regulation
- Deregulation
- Promoting small businesses
How can governments promote small businesses?
Governments may choose to increase competition by promoting smaller businesses. This is likely to involve tax breaks or subsidies for small firms, or helping entrepreneurs get they investment they need to start a new business.
Reducing regulations and ‘red tape’ is a good way to encourage new, smaller businesses to start up.
Increasing competition in this way should lead to greater choice and lower prices for consumers.
Privatisation
The transfer of the ownership of a firm/industry from the public sector to the private sector.
Which politician famously privatised industries?
Conservative PM, Margaret Thatcher, used privatisation to sell off many nationalised industries in the 1980s and 1990s, including British Airways, Jaguar, British Gas, British Steel, British Coal, etc…
Why might economists argue that privatisation would be more efficient?
A privatised firm would be open to free market competition. Private firms have shareholders and will have to maximise profits to keep shareholders happy. They primarily do this by increasing prices and cutting costs.
Why might economists argue that nationalised firms/industries are inefficient?
Because they lack competition and that can lead to market failure.
Governments can increase competition through privatisation.
What is a publicly owned firm/industry?
A publicly owned firm/industry is owned by the government.
The firm/industry will usually act in the best interests of consumers – so prices tend to be low and output tends to be high. This is possible because they don’t have to make profits.