Government Intervention Flashcards
Types of government intervention into monopolies
- Price regulation
- Profit regulation
- Quality standards
- Performance targets
Conditions for CMA to investigate mergers
CMA will investigate and block mergers if it believes to negatively affects consumers
- Combined turnover over $70M annually
- Combined market share over 25%
List Price regulation tactics by the government
RPI + K —— Allow some supernormal profit to invest while limiting it from exploiting consumers
RPI - X ——- Incentivise firms to become more efficient by cutting cost down
Explain how price regulation controls monopoly
- Government puts a price cap on the monopoly to protect consumers from high prices while encouraging firms to cut cost.
- Price cap is based on the RPI - X (efficiency gains required)
- By limiting price, consumers benefit from higher consumer surplus and affordability.
- This also encourages firms to cut cost to maintain their profit margins, reducing X-inefficiency
EV
- However, if X is too high, it may underinvest in infrastructure or RND, harming its long-term efficiency and quality.
- Regulatory capture may occur
What are the likely impacts of price regulation?
Consumers:
1. Lower price, higher consumer surplus
Producers:
1. Extension in demand
2. More allocative efficiency
EV
1. Reduce monopoly power
2. Reduces dynamic efficiency
Define regulatory capture
When regulators favour the company they regulate, harming consumers interest.
Define profit regulation
When firms’ profits are taxed at 100% above a certain profit limit
Explain how performance and quality standards control monopoly?
(NHS)
- The government may impose a quality standard on NHS to respond within 4 hours on accidents
- If the hospital falls to meet the target, they may be fined
- Incentivises the hospital to ensure an acceptable quality and standard
What methods can the government use to
increase competition and contestability?
- Deregulation
- Privatisation
- Competitive tendering for government contracts
- Promoting small businesses
Define deregulation
When regulations are removed to reduce barriers to entry.
Explain how deregulation leads to better competition
- Deregulation remove regulations, reducing barriers to entry
- This allows more firm to enter the market, increasing competition
- This encourages firms to cut prices or increase quality to attract more customers, increasing efficiency
Define privatisation
The government transfer of ownership from public sector firm to the private sector.
Explain how privatisation leads to better competition
- Government transfers a public sector firm to private sector, investors
- Investors now have a profit incentive to recover and earn more profit, they will attempt to cut cost and maximise profit
- Increasing efficiency and innovation, increasing competitiveness.
How does privatisation promote competition?
- New firms will enter the market (government public sector to private sector, allowing new firms to enter)
- Firms will compete with each other by lowering prices or better services.
- Unproductive, uncompetitive firms will be forced to leave the market
- More competition is resulted.
However,
1. Profit over quality → Private firms may prioritize profits over long-term investment, leading to cost-cutting in essential services, leading to lower quality for consumers.
- Market Failures → Natural monopolies (e.g., utilities) may still exploit consumers, leading to high prices and under-provision.
Define Competitive tendering
When the government outsources specific job contracts to the private sector. (PFI)
Briefly explain competitive tendering
government gives out contracts to private companies to bid,
they then select the one they find satisfied with
(usually one that is the cheapest and best quality)
Define anti-competitive practices
Anything that a firm does that reduces competition in the market
Briefly explain the Private Finance Initiative?
A method where private firms fund and manage public projects, while the government pays them overtime.
Firms are incentivised to cut cost to maximise their payouts from the government.
How does the government help small businesses grow?
and
How does that make the market more competitive?
- Tax breaks
- Loans
- Subsidies
All of which would allow small firms to compete more competitive against large firms.
Encouraging large firms to more productive to maintain their profit margins from decreasing to substitutes.
What are the advantages and disadvantages of PFI
AD
1. Promote competition
2. More efficiency
3. Cost saving
(ALL due to profit incentive)
DA:
1. Lost of quality to prioritise profit
2. More expensive due to higher interest, cost to maintain facilities
Define nationalisation
When the private sector transfers ownership of the firm to the government.
How does nationalisation protect suppliers and employees
Include EV
- Stable job and better working conditions
- government less likely to lay off workers for making a profit loss, or cut cost at the expense of workers’ condition to max profit as it aims to maximise welfare - Provides fair and stable contracts to suppliers,
- government not trying to profit max at suppliers’ expense
However,
- Strict pay structure
- limit wage pay for specialist managers who may earn more under private firm - Fewer job creation in long run
- Lack of funds for investment (due to no profit incentive), fewer jobs created compared to private firms
How does the government protect suppliers and workers from monopsony powers?
- Industry regulation and fines for exploitation of market power
- Block and demerge monopoly to remove dominance
- Tough standards on ethical sourcing of raw materials
What are the limitations to government intervention?
- Regulatory capture
- Asymmetric information
