Government Intervention Flashcards
Regulation Graphs
MC shift right with subsidy so MC original intersects AR; Price control at MC = AR; Price control AR = MR at MC Intersection
Both move to allocative efficiency
Examples of regulation
- Licensing
- Packaging standards
- Duties on facilities
- Tax on negative externalities e.g. emissions
Regulation Pros
Graph where possible
- Reduces supply of de-merit goods
- Reduces risk of Market Failure
- Reduces negative externalities
- May be more equitable by providing key services
Cons of Regulation
Graph where possible
- Risk of government failure with imperfect info
- Enforces monopoly power and reduces choice by raising costs of entry (Permits, licencing etc)
- Risk of regulatory capture
- High cost to gov of setting up regulators
Pros of Deregulation
Graph where possible
- Increase profits - Dyn Eff
- Increase contestability, potentially lower LT Prices
- Boost welfare as prices race ot he bottom and non price comp emerges
- Lowers financial burden of regulation
Cons of Deregulation
Graph where possible
- Raises risk of exploitation
- Expands externalities for better or worse
- Merit goods underprovided
- can be difficult to convert Nat M to competitive market
Role of the CMA
- Provide definitive action and legislation to enact competition policy
- Add or remove regulations
- Probe businesses to monitor M+A, normal operation, collusion etc
- Prioritise consumer (‘Consumer is King’)
EU competition policy objectives
- Eliminate firms with > 40% MS
- Market liberalisation
- Ensure subsidies don’t distort the market
- Merger control
Pros and Cons of International Competition Policy
Pros:
* Boost welfare, innovation, choice
* lower prices and incentivise efficiency and fair play
Cons:
* Free market economist would prefer unrestricted market forces
* Can be difficult to create comp from Nat M
* Highly beaurocratic
* Governments can conflict in objectives
Pros of Privatisation
Graph where possible
- Higer competition lowers prices
- Dynamically efficient
- Liberate government finances lowering PSBR
- Higher contestability
- LT Market Growth
Cons of Privatisation
Use graphs where possible
- Reduction is scale/Cherrypicking reduces consumer welfare
- Positive externality reduction
- May increase prices as firms are profit maxxing
- Gov assets may be undersold e.g. royal mail
Pros of Nationalisation
Graph where possible
- Prioritise consumer welfare (Al Eff)
- Prevents exploitation (if regulators do their job)
- Larger scale lowers costs, may lower prices and raise +ve Externalities
- Security of employment/jobs created
Cons of Nationalisation
Graph where possible
- High cost to Gov
- Reduces dynamic efficiency - lowers innovation
- Natural monopoly cannot be prod efficient
- Increases PSBR and absorbing of losses
