Government Intervention To Control Monopolies Flashcards
Types of government intervention to reduce monopoly power
Tax on monopoly profits
Liberalisation of markets
Introducing price capping policies
Nationalisation
How does a tax on profits reduce monopoly power
Reduces supernormal profits
How does a liberalisation of markets reduce monopoly power
Break up monopolies - allow smaller businesses to enter and increased contestability
How does an introduction of price capping policies reduce monopoly power
Encourages cost efficiency + increases consumer surplus
How does nationalisation reduce monopoly power
Take some monopoly utilities back into public ownership
Evaluation on a tax on monopoly profits
Risk of tax avoidance / loss of capital investment spending
Evaluation of liberalisation of markets to reduce monopoly power
Smaller businesses may struggle to scale up and compete
Evaluation of introducing price capping policies to reduce monopoly power
Monopolists may find revenues in other ways
Evaluation of nationalisation to reduce monopoly power
Possible loss of productive efficiency
What does the Financial Conduct Authority (FCA) do
Regulate firms and financial advisers so that markets and financial systems remain sound, stable and resilient
What is happening to price capping
It is now being phased out
Why is price capping now being phased out
As most utility markets have become more competitive giving consumer’s real choice
What is price capping an alternative to
Rate-of-return regulation - in which utility businesses are allowed to achieve a given rate of profit on capital
What is price capping within the U.K. known as
RPI-X
What does RPI-X do
Take the rate of inflation and subtracts expected efficiency savings X
Arguments for price capping with a monopoly
- prevents excessive profits
- reduced prices for consumers
- price capping helps to stimulate productive efficiency
- controls consumer price inflation
Arguments against price capping
- job losses
- distorts the price mechanism
- lower profits
To be effective what do price caps have tone set below
The normal profit maximising price
What does a price cap do to monopoly profits
Lower supernormal profits made by dominant firms in the market
What may price capping stimulate
Attempts to improve cost efficiency
Efficiency associated with price capping
It leads to an improvement in allocative efficiency and consumer welfare
How may price capping actually reduce competition
Lead to the exit of some businesses from the industry
Alternatives to price capping
- reduce entry barriers
- higher taxes on monopoly profits e.g. a windfall tax
