Government intervention Flashcards
What is the Competition and Markets Authority (CMA)?
UK government regulator tasked with ensuring that the creation of monopoly power is avoided and that consumers are not exploited in markets
The main form of consumer exploitation:
- higher prices
- less choice
- poor quality products
How does the CMA control mergers?
- CMA monitors merger activity with the aim of preventing any single firm gaining more than 25% market share
How is price regulation a type of intervention in monopoly markets?
- Monopolies aim to produce at the profit maximisation level of output (MC=MR)
- Results in higher prices and restricted output
- CMA uses maximum prices to lower prices and increase output by using the point of allocative efficiency (AR=MC)
- Firms make less supernormal profits
How is profit regulation a type of intervention in monopoly markets and evaluation?
- CMA may choose to limit the supernormal profit a monopoly can earn by calculating the firm’s total costs and then adding a % of profit onto it
However: - Firms are difficult for CMA to calculate
- Firms often try to inflate their perceived costs to make more profit
- Monopolies have no incentive to lower costs, if costs rise they are in perfect competition and consumers still pay higher prices
- Natural monopolies seem to post record profits year on year
How are quality standards a type of intervention in monopoly markets and evaluation?
- If there are no substitutes in a market, firms will maximise profit by reducing quality of raw materials and therefore quality of goods
- Regulators can step in to insist that certain quality standards are met
However - 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 quality standards as it reduces their supernormal profit
How are performance targets a type of intervention in monopoly markets?
- Regulators can also set performance targets so as to raise the quality of service and improve customer satisfaction
What intervention strategies are there for promoting competition and contestability?
- Promotion of small business - providing tax incentives and subsidies to small firms can help increase the number of new entrants into industries and thus promote competition
- Deregulation - Can increase industry costs or act as a barrier to entry, removing regulations can promote competition which also increases contestability
- Competitive tendering - government could choose to manufacture goods itself, decreasing competition, by outsourcing the supply of products, it generates more private sector activity and increases competition
- Privatisation - encourages new entrants to the industry as they feel they can compete more effectively with private firms
What is the impact of monopsony power?
Abusive towards suppliers, over time, can change the nature of entire industries in an economy
What can governments do to prevent monopsony power?
- Pass anti monopsony laws and issue fines if breaches occur
- Encourage firms to self regulate and trade fairly
- Appoint a regulator to monitor the practices in the industry
- Subsidise firms that are suffering from abusive monopsony power
- Can set minimum prices, which buyers have to pay suppliers
How can governments protect employees?
- National minimum wage
- Legislation on health and safety, working hours and conditions
- Permitting trade unions to operate in the economy
- Encourage firms to adopt the best practices
What are the impacts of government intervention on:
Prices
Profit
Efficiency
Quality
Choices
Prices - affordable and stable prices
Profit - consumers are no longer exploited through excessive prices, may breed inefficiency
Efficiency - reducing wastage of valuable resources and one of the best ways to achieve this is by developing rigorous competition (allocative efficiency) however dynamic efficiency may be less
Quality - Ensuring products are fit for purpose and contribute to a better standard of living
Choice - Wider choice improves standard of living and product quality, generates more economic activity and increases GDP, contestable market could involve just one firm so no choice
How does regulatory capture limit government intervention?
- Occurs when firms influence the regulators to change their decisions/policies to align more with the interests of the firm
- Some lobbying is corrupt
- Regulatory capture can completely prevent fair outcomes in markets
How does asymmetric information prevent government intervention?
- Often governments believe they are making the best decision, but many times it is no the best decision because governments and regulations either do not have the full or relevant information
- Responsible for government failures
What are the reasons for government intervention? Aka What can mergers and takeovers lead to?
- Greater market concentration and monopoly power with loss of allocative efficiency
- Higher prices for consumers
- Less consumer surplus an higher producer surplus if prices and profits rise
Job losses through rationalisation - Asset stripping and financial gains for some at expense of others
- Less choice for consumers
- A fall in the quantity of goods/services due to lessening of competition
What is the evaluation of merger control?
- The regulator does not have all the relevant information about possible costs and benefits (asymmetric info)
- The regulator is influenced in some way to act in the interests of firms (regulatory capture)
- Cost of investigations is high
- Significant time lag before a decision is made
What are the price limits formulae?
RPI - X = RPI and subtracts X determined by regulator, X represents efficiency gains which regulator has determined can be reasonably be achieved
RPI + K = RPI and allows for the addition of K which accounts for the additional capital spending that a firm has agreed with the regulator is necessary
