Government Intervention Flashcards
How to control mergers?
- CMA investigate mergers which achieve a market share greater than 25% and are seen to lessen competition.
- CMA can block mergers and make them sell off parts of business.
Problems with controlling mergers
- Regulatory capture
- Mergers are rarely investigated
- Asymmetric information
Ways to control monopolies
- Price regulation (RPI-X) and max prices
- Profit regulation
- Quality standards
- Performance targets
- Windfall taxes
RPI-X
A price cap where prices can only be increased by the RPI inflation - long term efficiency savings
Benefits of RPI-X
Improved efficiency
Problems with RPI-X
- X is hard to know with rapid technology changes
- If X is too high- firms may make losses or too low not very competitive outcomes
- Regulatory capture- regulators used to work in industry
- Expensive to investigate firms
- If firms become really efficient X will keep getting lower so the incentive to be efficient falls.
Maximum prices
- Prices set to allocative efficiency level (P=MC)
Benefits of max prices
- Improves consumer surplus
Problems with max prices
- Fall in dynamic efficiency
- Hard to know the right price
Quality standards
Government legislation to ensure monopolies don’t exploit customers
RPI +- K
Price cap where prices can be increased by the RPI +- a level in which firms can reinvest into the business on capital stock.
Problems with performance targets and quality standards?
- ‘Game the system’ - e.g. train companies saying train times will be longer to prevent delays.
- Unintended consequences e.g. if GPs see more patients less quality.
Rate of return profit regulation
Where regulators look at the size of the firm and decide what would be the reasonable level of profit based on their capital base.
If too much profit price caps or one off taxes may be enforced.
Problems with profit regulation
- Incentive for firms to increase costs and overemploy capital.
- ‘Game the system’- give out dividends to reduce profits.
- Hard to know right level.
- Asymmetric information on costs, capital, revenue and profits.
Windfall tax definition
Tax on large, excessive (seen as unfair) profits.
Problems with windfall tax
- Tax will increase AC and MC- increasing prices further- worsening monopoly outcomes.
- Promotes tax evasion/ avoidance (under reporting profits)
- Less innovation and dynamic efficiency.
Other policies to promote competition
- Privatisation
- Deregulation
- Trade liberalisation
Evaluation of monopoly intervention
- Monopolies have benefits (dynamic efficiency)
- Costs of intervention may be greater than benefits (government failure)
- Level of information
- Regulatory capture
Methods to promote competition and contestability
- Promotion of small business
- Deregulation
- Competitive tendering
Promotion of small business
- Government training and grants to new entrepreneurs through tax incentives or subsidies.
Advantages of the promotion of small business
- Improves efficiency
- More firms in the market
- Less X inefficiency
Deregulation
The removal of legal barriers to entry to a previously protected market to allow private enterprises to compete.
2015- Deregulation act
Advantages of deregulation
- Improved efficiency
Disadvantages of deregualtion
- Encourages poor business behaviour- fall in standards and health and safety.
Competitive tendering
- Government contracts for the provision of a good or service to a private company
- Competitive tenders draw up a specification for a good and invite private firms to bid for a contract to deliver it.
- The firm which offers the lowest price, highest quality and most efficient wins.
Advantages of competitive tendering
- Improved efficiency
Disadvantages of competitive tendering
- Costly and time-consuming process
- Private firms won’t maximise public welfare
- They may cost cutting which leads to a fall in quality
Restrictions of monopsonists
- Independent regulators to make sure they are buying fairly
- Anti-monopsony laws to make certain practices illegal
- Fines for monopsonists if they exploit their power
- MIn prices
How gov protects workers
- Health and safety laws
- Employment contracts
- Redundancy processes
- Max hours in work
- Right to be in a trade union
BUT: Too much legislation will decrease demand for labour due to extra cost of regulation.
