6EC03 - Government Intervention

Question 0

What are the 2 major methods of government intervention?

Answer 0

1) Competition policy

2) Regulation

Question 1

Why do governments intervene in businesses?

Answer 1

To maintain competition,

Prevent monopolies and mergers

Question 2

What is competition policy?

Answer 2

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’

Question 3

What is the competition policy’s aim?

Answer 3

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

Question 4

What measures do the competition policy use to enhance competition?

Answer 4

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

Question 5

What is legislation?

Answer 5

Measure to enhance competition

• competition authorities can pass laws
  e. g CC forced BAA to sell off airports

Question 6

What is privatisation?

Answer 6

Measure to enhance competition:

The transfer of organisations or assets from state ownership to private sector ownership

Question 7

What is deregulation?

Answer 7

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

Question 8

What is the Office of Fair Trading (OFT)?

Answer 8

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

Question 9

What is the competition committee (CC)?

Answer 9

Investigated potential monopoly situations

- conducts inquiries into mergers between firms in response to request from the OFT

Question 10

What are the benefits of privatisation?

Answer 10

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

Question 11

What are the costs of privatisation?

Answer 11

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

Question 12

What is contracting out?

Answer 12

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

Question 13

What is competitive tendering?

Answer 13

Introducing competition amongst private sector firms which put in view for work which is contracted out by the public sector

Question 14

What is an advantage of contracting out?

Answer 14

Government - saves money

Question 15

What is a disadvantage of contracting out?

Answer 15

Lower costs only achieves because private firms pay their workers less & work them harder
- taxpayers gaining & workers involved losing

Question 16

What is the Private Finance Initiative (PFI)?

Answer 16

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

Question 17

What are Public Private Partnerships (PPPs)?

Answer 17

Joint ventures between the government & the private sector

Question 18

What are some advantages of PFIs?

Answer 18

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

Question 19

What are some disadvantages of PFIs?

Answer 19

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

Question 20

What is regulation?

Answer 20

A direct control by government of firms

Question 21

What are some examples of regulation?

Answer 21

Price capping,
Monitoring of prices,
Performance targets,
Rate of return regulation

Question 22

What is price capping?

Answer 22

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

Question 23

What is ‘RPI - X’ in price capping?

Answer 23

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

Question 24

What is ‘RPI + K’ in price capping?

Answer 24

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

Question 25

What is the advantage of price capping?

Answer 25

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

Question 26

What is a disadvantage of price capping?

Answer 26

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

Question 27

What kind of regulation is where train-operating firms are forced to refund passengers if their train is more than an hour late?

Answer 27

Penalty attached to performance targeting

• consumers derive benefit if customer service falls below minimum standard
• however long to apply for refund

Question 28

What is an example of monitoring of prices?

Answer 28

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

Question 29

What is it about the longer the regulatory period?

Answer 29

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