Government Intervention Flashcards
Controlling mergers
- has the aim of preventing two large companies merging so thy do not exploit their customers by raising prices, or offering poorer quality services
- however, very few mergers are investigated each year. Can suffer from regulatory capture
- e.g. stoped the merger of Ryanair and airlingus
Pros:
- encourages innovation - dynamic efficiency - more choice
- prevents the exploitation of consumers -> higher prices -> preservation of consumer welfare
- less x inefficiency
Cons:
- would stop economies of scale which they could pass down to consumers potentially
- slow down the progress of technological advancements
Controlling monopolies
- price regulation: can force monopolies to charge a price below profit maximising price Vito ensure that they pass their efficiency gains to consumers. E.g. natural monopolies, water industries
- However difficult to know what would be the optimum output due to asymmetric information. E.g water industry was forced to cut prices by 10%
- Maximum prices can be set where they are alocative efficient. However effects dynamic efficiency
Profit regulation
- when government look to see if the firm is making a reasonable level of profit.
- prevents the monopolist from exploiting its market power to exploit consumers.
- taxation, windfall tax…
- however can evade tax on profits by transfer pricing in different countries
Quality standards
- monopolistic will only produce high quality goods if this is the best way to maximise profits
- the government can introduce quality standard which will ensure they do not exploit consumers
- hard to decide what is quality or not
Performance targets
- regulators can set punctuality targets such as for train operators. Or compare the performance of one region to another e.g. water industry
- will help firms improve their service and lead to gain for consumers
- they may find ways to meet targets without actually improving
- other firms will fail to meet their targets so there will be no improvements. Need to ensure fines are strong enough. e.g. network fail failed to deliver on their performance targets
Windfall tax
- Windfall taxes: taxes that are imposed after the event has occurred. One-off tax. Can discourage monopolistic from making excess profits or encourage them to reinvest them
Pros:
- perceived as fair as they target excess profits, benefit from the exploitation of natural resources to the broader population.
- may encourage investment in renewable energy
Disadvantages
- reduced investment and innovation as reduces the potential returns on investment
- higher energy prices, can effect lower-income households, exacerbate income inequality
- However it is not a long term solution as firms may underreport heir profits
Subsidies
- In order to achieve allocative efficiency, the government could subsidies monopolies
- Force them to produce where MC=P
- Taxing the profits would also allow the government to regain some of that money
- However giving subsidies to private sector monopolies is very unpopular
- However giving subsidies requires accurate knowledge of cost and revenue curves
Breaking up the monopolist
Can split the monopolists up into competing units
- should lead to lower prices and profits and greater consumer choice
- However difficult for the government to do
Promotion of small businesses
- can give training grants to new entrepreneurs and encourage small businesses through tax incentives or subsidies
- will increase competition since there will be more in the market, will offer a chance for more firms to join
- increases innovation and efficiency
Deregulation
- removal of legal barriers to entry
- will increase efficient in the market by allowing greater competition as more firms can enter and conduct more activities
- could privatise industries, which will allow competition in the market by allowing greater competition as more firms can enter
- however can lead to poor business behaviour
Privatisation
When state run organisations are sold off to the private sector as the private sector will run them for efficiently, due to profit motivation and competition
Advantages:
- Lack of political interference
- reduction of x inefficiency as firms need to constantly drive down costs to stay competitive.
- may lead to dynamic efficiency, may need to invest over time to get lower prices
- more productivity as workers know that their hard work will lead to high dividends
Disadvantages:
- assuming that there will be competition straight away from other firms. Therefore may be productive and allocative efficiency as no incentive
- firms will not want to sell loss making goods even if it is socially desirable
- loss of natural monopoly. Going to lose economies of scale. Loss of efficiency
- som argue that industries such as electricity, water and transport are important as they directly effect other industries so should be controlled by the government
- hard to regulate
Eval:
- depends on the level of competition post-privatisation
- level of government regulation. My not take into account negative externalities
Nationalisation
The process of taking an industry into public ownership
Advantages:
- greater potential for economies of scale
- more focus on service provision. Government will look to be allocatively efficient at a lower price
- less likely to be market failure as the government intends to maximise welfare. See to maximise social benefit.
- Public sector can be vehicle for macro-economic control. e.g. wage rates to control inflation
Disadvantages:
- risk of diseconomies of scale. Problems of communication, coordination, motivation. Increase in average cost and loss of productive efficiency
- lack of incentive to minimise costs
- complacently and wasteful production - leads to x inefficiency
- lack of supernormal profits. No innovation or tech gains for example
- expensive and a tax burden from the public. When on a budget deficit, can gov afford this
-opportunity cost
- higher prices due to lack of competitive drive
- greater risk of moral hazard, individuals that take the risk don’t bear the costs of the risk
-political prioritise override commercial issues
- suffer fro principal agent problem and moral hazard as they know that any los they will make will be covered by the government
EVAL:
- Privatisation better
- competition is private sector
- size of private sector firms
Deregulation
For:
- increased competition -> lower prices -> more allocative efficiency
- innovation -> dynamic efficiency
- more contestibility ->more consumer choice
Against
- reduced safety and quality -> companies may prioritise profits
- reduced consumer protection
- environmental costs -> negative externalities -> companies wont be held accountable
Examples:
- mail
