Government intervention Flashcards
Government intervention to control mergers:
CMA will consider the likely competitive situation if the merger goes ahead
compared to if it does not, and the merger will be approved if its potential benefits are greater than its cost.
A merger is investigated if it will result in market share greater than 25%
-Aim is to protect customers from being exploited by companies.
Govt intervention to control monopolies:
-Price regulations: Maximum price regulations could be set to prevent firms from exploiting customers.
-Profit regulations
-Quality standards: The government can introduce quality standards, which will ensure that firms do not exploit their customers by offering poor quality.
-Performance targets
Government intervention to promote competition and
contestability: promotion of small business
The government can give training and grants to new entrepreneurs and encourage small businesses through tax incentives or subsidies . This will increase competition since there will be more firms within the market,
Government intervention to promote competition and
contestability: deregulation
The removal of legal barriers to entry to a previously protected market to
allow private enterprises to compete. This will increase efficiency in the market by
allowing greater competition as more firms can enter and conduct more activities
than they could before
Government intervention to promote competition and
contestability: Competitive tendering
When a project is put out to tender so that private sector firms can bid for the right to provide the service such as laundry services in hospitals, school meal services and tenders to build and maintain public roads.
Government intervention to promote competition and
contestability: Privatisation
Privatisation is the sale of government equity in nationalised industries or other firms
to private investors. Encourages greater competition, which reduces X-inefficiency and ensures low prices and high quality as firms realise they need to be competitive
Government intervention to protect suppliers and employees:
restrictions on monopsony power of firms
Monopsonists are able to exploit suppliers by reducing prices. The government can
prevent these by passing anti-monopsony laws which make certain practices illegal
and can introduce an independent regulator who will force monoponists to buy
fairly.
Minimum prices can be set.
Government intervention to protect suppliers and employees:
Nationalisation
Nationalisation is when a private sector company or industry is brought under state
control, to be owned and managed by the government.
The impact of government intervention on:
Prices and profits
Governments are able to prevent monopolies charging excessive prices and aim
to limit their profit.
Prices decrease.
limits profits
The impact of government intervention on:
Efficiency
Increase efficiency in a market by increasing competition and contestability
The impact of government intervention on:
Quality
Quality regulations can maintain quality of product and services.
The impact of government intervention on:
Choice
If the government runs a business they are likely to offer less choice, since there is only one company producing the good.
However subsidising new firms to enter the market increases choice for consumers.
Limits to government intervention:
Regulatory capture
This occurs when the regulator is captured by the firm/industry they are regulating.
The fact that the regulator will often meet with the firm’s employees will mean they
become more empathetic and able to ‘see things from their perspective’ , which
will remove impartiality and weakens their ability to regulate
Limits to government intervention:
asymmetric information
This is where regulatory bodies have to use information provided to them by the
industries when setting price targets etc. It is in the industry’s best interest to maximise their profits and so may provide inaccurate or limited information, meaning
regulators are unable to set correct targets, prices etc.
