6EC03 - Government Intervention Flashcards
What are the 2 major methods of government intervention?
1) Competition policy
2) Regulation
Why do governments intervene in businesses?
To maintain competition,
Prevent monopolies and mergers
What is competition policy?
The means by which governments of countries & groups of countries seek to restore & maintain competition in markets
- ensure efficient working of markets
- improved consumer welfare
‘any action that prevents restricts or distorts competition should be blocked’
What is the competition policy’s aim?
Encourage business start-ups,
Encourage entry into markets by removing barriers to entry,
Take action against anti-competitive practices,
Prevent firms from abiding monopoly power
What measures do the competition policy use to enhance competition?
1) Fine firms
2) Force firms to remove barriers to entry
3) Make firms sell off their assets/ break up dominant firms
4) Introduce price controls
5) Stop collusion
6) Block mergers/ takeovers
What is legislation?
Measure to enhance competition
- competition authorities can pass laws
e. g CC forced BAA to sell off airports
What is privatisation?
Measure to enhance competition:
The transfer of organisations or assets from state ownership to private sector ownership
What is deregulation?
Measure to enhance competition:
The process of removing government controls from markets
e.g few letters carrying Royal Mail now allowing more firms to compete for postal services
What is the Office of Fair Trading (OFT)?
Independent body funded by government making sure that markets work in interest of customers
- can impose sanctions
- refer to CC for investigation
- can fine firms up to 10% of their turnover if found guilty
What is the competition committee (CC)?
Investigated potential monopoly situations
- conducts inquiries into mergers between firms in response to request from the OFT
What are the benefits of privatisation?
Cost - publically owned industries no incentive to cut costs therefore likely to be x-inefficiency
- privatised owned have incentive to reduce cost as translated into higher profit leads to greater productive efficiency
Choice & quality - public sector little incentive to produce goods for consumers tend to be mass producing
- private sector incentive to provide both choice & quality
- if private in competitive market then failure to provide choice will result in consumers buying from other firms
- choice & quality aspects of allocative efficiency
Innovation - can earn higher profit of innovate & persuade consumers to buy more
- increase dynamic efficiency
What are the costs of privatisation?
Monopoly - charge high prices & restricting output leading to loss of allocative efficiency
e.g British steel
Equity - process of privatisation leads to change in pricing structure
- gainers & losers in consumers
Externalities - increase negative environmental externalities
What is contracting out?
Getting private sector firms to produce the goods & services which are then provided by the state for its citizens
- tends to be for public or merit goods
e. g NHS equipment, tanks used in British army
What is competitive tendering?
Introducing competition amongst private sector firms which put in view for work which is contracted out by the public sector
What is an advantage of contracting out?
Government - saves money
What is a disadvantage of contracting out?
Lower costs only achieves because private firms pay their workers less & work them harder
- taxpayers gaining & workers involved losing
What is the Private Finance Initiative (PFI)?
A means of financing government projects using private sector funding
(form of PPP)
e.g private sector builds & maintains infrastructure like a school, hospital or road
What are Public Private Partnerships (PPPs)?
Joint ventures between the government & the private sector
What are some advantages of PFIs?
1) Private sector - expertise in delivering higher quality & at lower cost
2) Government - free to focus on its requirements rather than worrying about construction & running the facility
3) Innovative solutions to problems - interaction of public & private sector
4) Infrastructure more affordable to government as less borrowing needed - project paid for in lease over time of project
What are some disadvantages of PFIs?
1) Not as cost effective for the taxpayer - public sector negotiated deals giving private sector too large a profit
2) Inadequate service - closely performance targets written however, so some PFI projects can fail to meet them
3) Risk - for private sector companies participating as if fail to deliver lose out financially
4) Expensive - more than traditional government investment
- gov. can borrow at low IR’s as seen as most secure but companies will be more expensive
5) Trade unions argue PFIs are cheaper as private sector pay lower wages than public sector
What is regulation?
A direct control by government of firms
What are some examples of regulation?
Price capping,
Monitoring of prices,
Performance targets,
Rate of return regulation
What is price capping?
Form of regulation that sets a cap on the amount that certain firms can raise their prices
- maximum price increase that the firm can impose on its customers
- usually based on rate of inflation as measured by the RPI
What is ‘RPI - X’ in price capping?
Takes RPI & subtracts factor ‘X’ determined by the regulator
- ‘X’ = efficiency gains that the regulator has determined can reasonably be achieved by the firm in question
What is ‘RPI + K’ in price capping?
Takes RPI and allows addition of factor ‘K’
- accounts for additional capital spending that a firm had agreed with the regulator is necessary
- used by water regulators to determine price for each of regional water companies
- ‘K’ factor different for each water company depending on how much required to spend to maintain & improve quality of service
- similar system used for train-operating companies
What is the advantage of price capping?
1) Allows firm to keep any profits it makes through increased efficiency gains than regulator has calculated as reasonable
2) ‘X’ or ‘K’ usually in place for reasonable period e.g 5yrs so firms can plan ahead & know that they’ll not be unduly penalised for making further efficiency gains
What is a disadvantage of price capping?
If regulator underestimates efficiency gains a firm can be expected to make then firm can produce excessive profits
- often these profits used to invest in areas outside regulators remit therefore generate even greater profits in future
What kind of regulation is where train-operating firms are forced to refund passengers if their train is more than an hour late?
Penalty attached to performance targeting
- consumers derive benefit if customer service falls below minimum standard
- however long to apply for refund
What is an example of monitoring of prices?
2012 prime minister complained about 400 different price systems for gas & electricity in UK
- Ofgem (gas & electricity regulator) made decision price tariffs simplified & customer told best deal they can
- Government easy access to any abuses of monopoly power
What is it about the longer the regulatory period?
The longer the firm can adapt to the controls
Firm can make profits within parameters set
However if period too long:
- firm might not be forced to make more efficiency savings
- may be prevented from making profits which would enable it to adapt & grow
