3.6.2 - impact of government intervention Flashcards
Limit to government intervention
o regulatory capture
o asymmetric information
Why does excessive adminstrative costs exist in government intervention causing gov failure
- costs created by
regulation, subsidies, state provision, price controls
Common causes of government failure
- 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
How to evaluate gov intervention
effects on:
o prices
o profit
o efficiency
o quality
o choice
effect of gov intervention on price
- 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.
effect of gov intervention on efficiency
- 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.
Reality of government intervention
- 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.
Theory behind gov intervention
- 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 .
Why is gov intervention limited on the whole
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.
Example of regulatory capture
alleged capture of HMRC by Vodafone, who negotiated a tax reduction from £7bn to £1bn in 2009-10
Explain reguaktory capture
- 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.
Common root cause of RC
- 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.
Why does assymetric information cause gov failure
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
Why is assymetric info a problem?
- 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.
Causes of RC:
bribery, familiarity, revolving door
Bribery causing RC
- Government officials, like the rest of society, is to some extent motivated by financial
reward. - firms bribe regulators to meet their objectives
familiarity causing rc
- 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.
What are revolving doors?
- Regulators often go on to work for companies they were previously responsible for
regulating.
Example of revolving doors causing rc
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*.
Why does revolving doors occur
- 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…
Impacts of rc on quKITY
- ## If regulators do not enforce minimum standards of service the quality of goods and services are likely to fall
Effect of rc on price
- 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
externalties created by rc
- 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.
define regulatory capture
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.”
Why else does rc occur
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
examples of rc
- 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
