3.6.2 - impact of government intervention

Question 1

Limit to government intervention

Answer 1

o regulatory capture
o asymmetric information

Question 2

Why does excessive adminstrative costs exist in government intervention causing gov failure

Answer 2

• costs created by
  regulation, subsidies, state provision, price controls

Question 3

Common causes of government failure

Answer 3

• political self interest: farm support policies, drinks industry, transport lobby
• poor value for money: investment on IT projects for NHS, poor record for PFI projects
• policy short termism: road widening to reduce congestion, ASBOs for offenders
• regualtory capture: self regulation on alcohol prices, powerful energy lobby
• conflicting objectives: minimum carbon prices damages uk competitiveness
• bureaucracy and red tape: costs of meeting health and safety enviro law
• unintended consequences: smoking ban - increase used of outdoor patio heaters

Question 4

How to evaluate gov intervention

Answer 4

effects on:
o prices
o profit
o efficiency
o quality
o choice

Question 5

effect of gov intervention on price

Answer 5

• Governments are able to prevent monopolies charging excessive prices and aim
  to limit their profit.
• ensure that consumers pay fair prices, receive a good quality service and have a lot of choice through different methods of
  regulation and target setting.
• High regulation may force some firms out of the industry, which would reduce choice.

Question 6

effect of gov intervention on efficiency

Answer 6

• They can increase efficiency in a market by increasing competition and contestability. By regulating prices, they ensure a business keeps their costs low and so prevent X-inefficiency.
• They try to increase dynamic efficiency by encouraging investment.
• However, if the government regulates too strongly, they can push costs
  up and led to inefficiency.

Question 6

Reality of government intervention

Answer 6

• government may be X-inefficiency : no incentive to be efficient due to the lack of competition.
• increase prices and reduce the quality of a good; the private sector may have expertise and knowledge which the government might not have.
• The government are likely to offer less choice, since there is only one company
  producing the good.

Question 7

Theory behind gov intervention

Answer 7

• in theory, they should reduce prices and
  increase quality as they aim to benefit consumers.
• A public sector business is likely
  to be allocative efficient, as they aim to maximise social welfare. They will see lower
  costs due to economies of scale .

Question 8

Why is gov intervention limited on the whole

Answer 8

because of the political power of large firms and industries as a whole. They are able to lobby the government and set up pressure groups.

Question 9

Example of regulatory capture

Answer 9

alleged capture of HMRC by Vodafone, who negotiated a tax reduction from £7bn to £1bn in 2009-10

Question 10

Explain reguaktory capture

Answer 10

• This occurs when the regulator is captured by the firm/industry they are regulating.
• The fact that the regulator will often meet with the firm’s employees will mean they
  become more empathetic and able to ‘see things from their perspective’ , which
  will remove impartiality and weakens their ability to regulate.

Question 10

Common root cause of RC

Answer 10

• Large corporations can invest huge amounts in learning how to play the system and
  in gaining the support of their regulator.
• It also is likely that the regulator will have
  worked in the sector for many years, as these people will have experience and
  knowledge of the industry.
• As a result, they will have personal connections with
  those that they are regulating and this makes it difficult for them to be unbiased.

Question 11

Why does assymetric information cause gov failure

Answer 11

government failure may occur if regulation such as RPI-X or quality standards are not set correctly. The government will be unable to regulate the companies accurately due to assymetric info

Question 12

Why is assymetric info a problem?

Answer 12

• regulatory bodies have to use information provided to them by the industries when setting price targets etc.
  -It is in the industry’s best interest to
  maximise their profits and so may provide inaccurate or limited information, meaning
  regulators are unable to set correct targets, prices etc.

Question 13

Causes of RC:

Answer 13

bribery, familiarity, revolving door

Question 14

Bribery causing RC

Answer 14

• Government officials, like the rest of society, is to some extent motivated by financial
  reward.
• firms bribe regulators to meet their objectives

Question 15

familiarity causing rc

Answer 15

• government officials often work closely with members of the firms they regulate e.g. to receive information
• regulators and firms become friendly
• This can lead to bias and an
  increased willingness to go easy on those they are regulating. UK regulators of the audit
  industry have been accused of this.

Question 16

What are revolving doors?

Answer 16

• Regulators often go on to work for companies they were previously responsible for
  regulating.

Question 17

Example of revolving doors causing rc

Answer 17

Often these people are paid large salaries e.g. former Chancellor of the Exchequer, George Osborne, is paid nearly £800k by Blackrock; a global financial assessment
company*.

Question 18

Why does revolving doors occur

Answer 18

• These jobs may be rewarded due to lenient treatment these firms received
  during the time regulators were in office. Perfect conditions for regulatory capture!
• *Blackrock made a large profit from the privatisation of the Royal Mail. A politician
  responsible for this privatisation: George Osborne. Funny old world…

Question 19

Impacts of rc on quKITY

Answer 19

• ## If regulators do not enforce minimum standards of service the quality of goods and services are likely to fall

Question 20

Effect of rc on price

Answer 20

• Prices are likely to be higher if a regulator has been ‘captured’.
• For natural monopolies, this
  would means regulators would be more likely to be generous when setting permitted price
  rises e.g. RPI + 3% instead of RPI + 2%.
• This will impact poorer households more than richer ones i.e. it would have a regressive effect

Question 21

externalties created by rc

Answer 21

• External costs are more likely to be ignored if regulators have been captured.
• A restaurant regulator that has been captured is less likely to ensure high food hygiene standards.
• This could result in outbreaks of food poisoning thus causing people to miss work and increasing costs for public health care.

Question 22

define regulatory capture

Answer 22

Regulatory capture is a form of government failure. It happens when a government agency operates in favour of producers rather than consumers. Regulatory capture is also known as a form of political capture or “cronyism.”

Question 23

Why else does rc occur

Answer 23

underresourced regualaotry means they dont have enough funds to scrutinise an industry properly
- or lack of power; christine tacon , the first goceries code adjudicator, only gained poiwer to scrutinise once the scandal of tesco delaying supplier payments has occurred

Question 23

examples of rc

Answer 23

• george osborne to earn £650 000 at blackrock for 4days a month
• alistair darling joins board at morgan stanley
• fomrer uk pm gordon brown joins pimco as adviser
• tony blair joins jp moragn as senior advisory