Government Intervention Micro Flashcards
Why should govt stop sale to foreign companies?
Protect jobs - firm might move factories elsewhere as they offer cheaper labour, loss of jobs domestically
Protect choice - less firms in market, less comp meaning monopoly power increase
Protect BOP and tax revenue - country loses out on the exports, and corporation tax
Sale to foreign company eval
Doesn’t necessarily mean that location will change, protecting BOP, tax, jobs etc
Company could be more dynamically efficient as a result of greater resources - greater choice
Protectionist methods promote inefficiency
Controlling monopolies
Price Regulation
Profit Regulation
Quality Standards
Performance Targets
Price Regulation
Forces price to be set at levels lower than profit max
RPI - X + K leads to increased investment (mandatory)
Creates efficiency incentive
However, difficult to know where to set X due to rapid technology improvement and asymmetric info
But max prices could be set as a blanket solution, but hard to determine said price and also limits dynamic efficiency
Profit Regulation
Prices are set so that operating costs and fair ROI rate are covered
Encourages investment and prevents high prices but too much capital employment, not human
Little incentive to be efficient
Quality Standards
Monopolists only produce good goods if they can maximise profits
Govt can check customers are not exploited with poor quality products
Performance Targets
Compared against different regions
Requires significant political power to implement, loopholes
Some companies will just pay the fine
Promoting Contestability
Subsidies - given to small businesses to increase competition. X-efficiency goes up
Deregulation - legal barriers of entry are removed, increases competition and efficiency. However could be long term negative effects of safety and market stability
Tendering - private firms are contracted to provide services which are then bought by the govt. Costs minimised but so is quality if bids are cheap
Protecting suppliers and employees
Restrictions on monopsony power - independent regulator to force fair buying of products. fines may not be sufficient deterrent though.
Workers rights - various legislation and max hours. long term productivity boost as workers are more motivated and safe
Privatisation advantages
Greater comp, reduces X-inefficiency, lowers prices and increases quality
Public sector net spending goes does down, as initial revenue comes via the sale of the shares
Greater stability as less govt interference
Privatisation Disadvantages
Could lead to exploitation of power - especially in monopolies
Negative externalities and inequality
Loss of revenue for govt
Nationalisation Advantages
Better for monopolies to be run by state to maximise social welfare
Govt considers externalities
Guarantees minimum level of service
Impacts of Govt Intervention
Stops monopolies from exploiting customers, ensures competition and fair prices
Regulation may force firms to leave the industry tho
Increases efficiency via increased comp. However could also push costs up
Nationalisation will be X-inefficient, pushes up prices and offers less choice
Govt Intervention is low due to lobby groups
Impacts of Govt Intervention
Stops monopolies from exploiting customers, ensures competition and fair prices
Regulation may force firms to leave the industry tho
Increases efficiency via increased comp. However could also push costs up
Nationalisation will be X-inefficient, pushes up prices and offers less choice
Govt Intervention is low due to lobby groups
Regulatory capture
When firms can use their influence to mitigate the effect of regulation
EG vodafone went from 7bn tax to 1bn
