3.6.2 The impact of government intervention

Question 1

Overall impact of government intervention

Answer 1

Government intervention on the whole tends to be limited 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 2

Impact of government intervention on: prices/profits

Answer 2

Governments are able to prevent monopolies charging excessive prices and aim to limit their profit. They try to 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.
Eval: High regulation may force some firms out of the industry, which would reduce choice and therefore consumer surplus, satisfaction, utility

Question 3

Impact of government intervention on: efficiency

Answer 3

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.
Eval: if the government regulates too strongly, they can push costs up and led to inefficiency.

Question 4

Impact of government intervention on: quality

Answer 4

If the government runs a business, 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 .
Eval: However, the government may suffer from X-inefficiency as they have no incentive to be efficient due to the lack of competition. This may push up prices and reduce the quality of a good; the private sector may have expertise and knowledge which the government might not have.

Question 5

Impact of government intervention on: choice

Answer 5

The government are likely to offer less choice, since there is only one company producing the good.

Question 6

Limits to government intervention

Answer 6

Regulatory capture
Asymmetric information

Question 7

Regulatory capture

Answer 7

• Regulatory capture is a form of government failure. It happens when a government agency operates in favour of producers rather than consumers.
  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.
• 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.
• This is an example of ​government failure​, and argues that government regulation is not the most effective method of achieving competition and efficiency.

Question 8

Regulatory capture example

Answer 8

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

Question 9

Asymmetric information

Answer 9

This is where 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.
- As a result, 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.