Government intervention Theme 3 Flashcards
How can the gov intervene to control monopolies? (12 methods)
- Price regulation
- Profit regulation
- Quality standards
- Performance targets
- Breaking up the monopolist
- Lowering barriers to entry though deregulation
- Windfall taxes
- Privatisation
- Nationalisation
- Subsidies
- Self regulation
- Merger policy
Why do the gov want to limit monopoly power? (5 reasons)
- Consumer Protection: Monopolies can charge excessively high prices
- Preventing Market Failure: Without competition, monopolies can lead to inefficiencies in resource allocation,
- Innovation & Quality: Competitive markets encourage innovation and improved product quality.
- Preventing Abuse of Power: Monopolies can exploit their dominant position, potentially leading to unfair business practices (e.g., restricting supply, lowering wages).
- Equity & Fairness: Monopolies often lead to wealth concentration in the hands of a few, increasing income inequality.
How is profit regulation done?
When the gov calculate operating costs and adding rate of return (profit) on capital employed
However, hard to calculate operating costs
What are windfall taxes?
Taxes imposed after an event has happened where firms made a lot of profit
- so the gov hits a heavy tax to take away monopoly power, discouraging them
However, firms may hide profits
What’s privatisation vs nationalisation?
Privatisation is giving a state owned firm to private
- increases their efficiency and incentive to lower costs
- encourages competition
Nationalisation is giving a private owned firm to public
- leads to falling prices and increased output
- monopoly not taking advantage of consumers, so decreased power
What’s self regulation?
When firms set their own standards to avoid threat of gov
Common
Gov sees this as firm don’t need to pass legalisation
Could be very weak regulation
How can the gov intervene with monopsony powers?
Make some of their powers illegal
- like buying for very low price
and they they need to buy more
Appoint an indépendant regulator which forces them to change
Encourage self regulation
- weak option
What’s regulatory capture?
When firms take advantage of the Govs regulations
- Example of gov failure
- E.g firm can develop a favourable relationship with regulator
How can the gov intervene with the labour market? (6 ways)
- Min wages
- Max wages
- Providing training and education programs to improve labor productivity.
- Regulating trade unions and encouraging collective bargaining.
- Legislation, to ensure workplace safety, equality, and protection against unfair dismissal.
- Welfare benefits, like unemployment benefits to provide a safety net for the unemployed
What happens to the labour market when a minimum wage is in place?
In a market where the equilibrium is below min wage, the min wage means there will be excess supply
- not enough firms will demand labour
- leading to increased unemployment
Hence, min wages increases unemployment
Firms will need help to shift up demand curve past new equilibrium
What 3 factors does a min wage depend on to affect unemployment?
-Where existing equilibrium is, so if already above, there’s no effect
- Elasticities of demand and supply of labour
- might affect only some industries, so may not be significant to economy as whole
Why are maximum wages used?
Can be implemented to control inflation
Stops greed of managers, like CEO’s
Can be used in public sector to keep spending down
What affects does a maximum wage have on labour market?
A maximum wage, if under the equilibrium, will lead to excess demand from firms
- so as there is less supply, unemployment rises
What does CMA stand for?
Competition and Markets Authority (CMA)
They are in charge of keeping monopolies under control etc.
