Government Intervention and Product Markets Flashcards
Profit Control
The government puts a cap on the rate of return a monopoly receives. It is done by calculating the operating costs of monopoly and adding a rate of return.
Nationalisation
Private sector becomes public sector (government owned)
Deregulation
Removing government regulation
How can a government control Monopolies?
Price Control - Stop monopolies forcing potential competition out of the market by reducing prices drastically.
Profit Control - Profit control can be used to stop monopolies exploiting consumers by selling goods/services for a very high price.
Quality Standards - Ensure the monopoly firm will not cut so many corners for a low-quality product, and then resell on for a high price.
Performance Targets - To avoid monopolies becoming too complacent due to the monopoly having high market share.
Breaking Up Monopolies - Benefits consumers because there will be increased competition, increased choice and due to competition, higher quality goods at lower prices.
Lowering Entry Barriers - Allows for increased competition, increased innovation, quality, lower prices etc
Windfall Taxes - A tax levied on unexpected large profits. Stops monopolies drastically inflating prices.
Privatisation and Nationalisation - Privatisation allows for more innovation due to the market being more free.
Nationalisation can lead to monopolies not exploiting consumers.
Deregulation - New entrants into the market have less barrier to entry, increasing competition.
Subsidies - Subsidising newer entrants to the markets gives newer firm an advantage, increasing competition.
Competitive Tendering
Introducing competition among private sector firms which put in bids for work which has been contracted out by the public sector.
Government intervention in product firms is designed to
Lower Prices to Customers
Reduce Abnormal profits achieved by firms expropriating consumer surplus and turning it into producer surplus
Increase produce, allocative and dynamic efficiencies
Increase the quality of the product (when quality is an issue)
Increase consumer choice
Regulatory Capture (Government Failure)
When firms in an industry are able to influence, to their advantage, a regulatory body which is supposed to be regulating the behaviour of these firms.
Government intervention can be limited or ineffective
One reason is asymmetric information - If the firm has more knowledge of the product over the government, then the government cannot intervene as necessary.
A second reason could be collusion, if two large firms collude and the government is not aware, the government cannot intervene accordingly.
A third reason could be if the firm is operating within the black market, the government would have no information on the firm, therefore cannot intervene accordingly.
Price controls may lead to exploitation on employees (lower wages, poorer working conditions etc)
In developing countries, the monopoly firms may have more power over the government.
Government intervention may fail to bring social optimum output.