Government Intervention Flashcards
How do governments control monopolies?
Price regulation - through preventing monopolies charging excessive prices this might result in a loss of allocative efficiency
Profit regulation - through high corporation tax on any profits this encourages investment
Quality standards - regulators can observe the quality of the goods and services of the firm
Performance targets -
minimum target is being met to regulate quality. This improves social welfare.
How does the deregulation and privatisation promote competition and contest-ability?
Makes a market more competitive, which should improve economic efficiency
Deregulation reduces government power and enhances competition, market forces, produce what consumers want
Excessive regulation can limit the quantity of output that a firm produces
How does competitive tendering for government contracts improve competition and contest-ability?
The government could contract out this provision so that private firms operate things such as roads or hospitals
The firm that offers the lowest price and best quality of provision wins the government contract. The private sector has an incentive to reduce their costs, since they operate in a competitive market
How does restrictions on monopsony power of firms protect suppliers and employees?
Farmers can lose profits due to monopolies having power that can negotiate a better price
Governments can regulate this to ensure that farmers are receiving a fair deal. They can do this through grants and subsidies
The CMA might investigate to check monopsony’s are not abusing their buying power
How does nationalisation protect suppliers and employees?
Nationalising an industry creates a natural monopoly. Often, because it is inefficient to have more than one eg. water
Some nationalised industries have very strong positive externalities
Nationalised industries have different objectives to privatised industries, which are mainly profit driven. Social welfare might be a priority of nationalised industries.
Privatised firms and nationalised firms are likely to operate where?
Profit maximising MR=MC -> up to AR
Allocatively efficient point AR=MC
What is the impact of government intervention on prices?
Governments prevent monopolies charging excessive prices = might result in a loss of allocative efficiency
Make essential services more affordable = benefit those on low or fixed incomes
Limiting how much a firm can increase its prices by = encourages the firm to become more efficient. So can lower their costs and increase their profit margins
High corporation tax = firms might pass on the extra cost onto consumers, resulting in higher prices
What is the impact of government intervention on profit?
Strict price caps = limited investment as profit is restricted
The likely impact of government intervention on efficiency?
Increase government intervention might lead to an increase in economic efficiency, since the objectives change from profit maximisation to maximise social efficiency
Why might private sector be more efficient than the public sector ?
Operating in a competitive environment, firms have an incentive to become more efficient
As they are forced to lower their average costs to profit maximise
Private sector also have to produce the goods and services that consumers want, to keep earning profits
This might increase allocative efficiency
What is the impact of government intervention on quality?
Ensures firms are focusing on increasing social welfare by ensuring they meet minimum targets
What impact does government intervention have on choice?
If governments regulate monopolies and encourage startups and growth consumer choice widens
A price ceiling might force some supplies out which reduces the quantity and choice
Governments can reduce prices of a good or service which can make it more accessible by for those on lower incomes
Regulatory capture
Firms covered by regulatory bodies, such as utility companies can sometimes influence the decisions of the regulator to ensure that the outcomes favour the companies, and not the consumers. Might pressurise regulatory bodies into making decisions that benefit them
Why is regulatory capture a limit to government intervention?
When regulators start acting in the interest of the company rather than the consumer
Why is asymmetric information a limit to government intervention?
It’s hard for governments to decide what price to put a price cap
It’s hard to decide what a cost to society is, in a market with market failure as it might be different between each person
Without sufficient information governments could make poor decisions and lead to a waste of resources
