Government intervention Flashcards
What are some government interventions?
Controlling monopolies:
Price regulation
Price regulation including price capping
Quality standards and performance targets
Promoting competition and contest ability
Enhancing competition between firms through promotion of small business
Deregulation
Competitive tendering for government contracts
Privatisation
To protect suppliers and employees
Restrictions on monopsony power of firms
Nationalisation
What is price regulation?
As firms want to make super normal profit they increase prices and limit the output.
So the CMA used maximum to lower prices and increase output.
They can determine a maximum price but identifying the points of allocative efficiency.
This is a strategy often used on natural monopolies.
Then firms will make less supernormal profit than before.
What is profit regulation?
The CMA may choose to limit the supernormal profit a monopoly can earn.
They do this by calculating the firms total costs and then adding a percentage of profits to it.
However, it s a very contentious policy as:
Costs are difficult for the CMA to calculate
Firms often try to inflate their perceived costs so as to make more profit than allowed
Monopolies have no incentive to lower costs, so if costs are higher than they would in perfect competition and consumers still end up paying higher prices
What is quality standards?
One way to maximise profits is to reduce the quality of the raw material which reduces the quality of the end good/service.
If there is no substitute the this is a likely outcome.
Regulators can step in to insist that certain quality standads are met.
It can be difficult for them to know what the potential quality of a product is or what standards to impose.
Firms push back on these quality standards as they reduce their supernormal profit.
What is performance targets?
Regulators can also set performance targets so as to raise the quality of the service and improve customer satisfaction.
What does promotion of a small business do?
It provides tax incentives or subsidies to small firms that can help the number of new entrants into an industry and thus promote competition.
What is deregulation?
Government intervention can increase the industry costs or act as a barrier to entry.
Removing regulation can promote competition which will also increase the contesability in the market.
What is competitive tendering?
It is for government contracts. As a major provider of goods and services in the economy the government could choose to manufacture many products itself & this would decrease competition. By outsourcing the supply of these products it generates more private sector activity & increases competition.
What is privatisation?
Privatisation encourages new entrants to the industry as they feel they can compete more effectively with private firms which perhaps have less resources available to them
How does monopsony power protect supplies?
Monopsony power is abusive towards supplies and over time can change the nature of the entire industries in an economy.
Governments can pass anti monopsony laws and issue fines it breach occurs.
They can encourage firms to self regulate and trade fairly.
They can appoint a regulator to monitor the practices in nth industry.
They can subsides firms that one suffering from abusive monopsony power.
They can set minimum prices which buses name to pay suppliers.
How does nationalisation protect supplies?
It can he used Te break the market power of the abusive firms resulting in better treatment of supplies
What are some ways to protect employees?
National minimum wage
Permitting trade unions
