Government Regulation of Markets Flashcards
Economic Systems
Main ways an economy can be run:
- Market economy (free market)
- Command economy
- Mixed economy
Market Economy
Price: determined by equilibrium point
Products supplied: determined by supply and demand
Distribution of products: based on price and who can afford to buy them
Command Economy
Price, products supplied and distribution is all dictated by the government
Mixed Economy
A combination of free market and command.
Market Failure
When a market fails because supply and demand do not result in an outcome that satisfies consumers and suppliers. Examples include monopolies, demerit goods and inappropriate prices
Monopoly
Where there is a sole supplier of a good or service in a market.
Positives: some industries are served more efficiently by a monopoly (utilities), large companies have a positive impact in industries where R&D costs are high.
Negatives: can set excessive prices, big companies may form a cartel
Cartels
Companies work together to keep prices high or restrict supply to ensure limited competition in the industry. Can be official or unofficial
Competition Policy
Addresses monopolies, abusing market power and mergers and acquisitions
Nationalisation and Privitisation
Industries that are more efficient with a monopoly may be nationalised, ie when the state owns the industry (like the NHS)
Some industries may be privatised to increase competition, but set up an industry body to regulate. A state owned industry is sold to a private owner (like rail travel)
Abusing Market Power
Examples include:
Companies colluding to restrict supply and inflate prices
Creating barriers to entry - reducing prices to below average cost to prevent entrants
Exclusive distributer/retail/supplier agreements
Imposing switching costs
Collusion between two suppliers
Collusion
Two suppliers privately agreeing to a pricing strategy
Mergers and Acquisitions
M&A’s judged to be against the public interest can be blocked by a gov.
Merger = two companies combine
Acquisition = one company buys another
Inappropriate Pricing
Sometimes in a market economy, the equilibrium can be too low without gov intervention, for example farming. If there’s high supply of a crop, price is low and jobs become at risk. Low supply drives prices up and people can’t afford to eat.
CAP (Common Agricultural Policy)
EU agricultural policy to provide various programmes and subsidies to farmers. Farmers need protection as they’re at risk from big retailers, weather, tech, and governments know food supply is important
CAP
Advantages: Producers guaranteed stable income Stable income can go to R&D Stable supply and prices for customers Can address other issues, e.g environment
Disadvantages:
Possibility of surplus products
Misallocation of resources
Maximum Pricing
Introduced where equilibrium price is too high. Used when:
Customers exploited by monopoly
Unexpected shortage threatens price increase
Ensure affordability to all sectors of society
Reduce inflationary pressures
Maximum Pricing Shortages
Max price is below equilibrium so there is excess demand and possible shortages. Shortages create:
Black markets
Reduced supply
Reduction in quality
Externalities
The way anyone who isn’t a seller or consumer is affected by a transaction
Negative Externalities
Third parties are negatively affected. Can be dealt with through: Tax - e.g excise duty Evaluation of social cost Regulation Increased info for consumers Compensation schemes
Positive Externalities
Third parties positively affected. Can encourage positive externs by:
Increase supply
Increase demand
Evaluation of social benefit
Merit Goods
Goods which are considered suitably important and necessary so as to warrant being provided through public finances, e.g education.
Everyone should have access, but consumers unaware of the benefits
Often provided by the state to prevent under consumption
Demerit Goods
Goods which harm consumers in some way or are socially unacceptable.
People are unaware of/ignore the costs of using the good and it harms the consumer or is socially unacceptable.
Regulated or banned through tax, law and advertising
Public Goods
Goods not produced by the market but are necessary and so produced by gov interv.
Non availability - you can’t stop anyone from consuming it and non-rivalrous - one person’s consumption doesn’t reduce another’s
Public Goods
Advantages:
Wouldn’t be produced otherwise
State provision at large scale means EoS
Cost to individuals is kept low
Disadvantages:
No one can opt out
No allocative efficiency as production levels are dictated by the gov, not the market
Allocative Efficiency
Where level of production is consistent with consumer demand
Environmental Converns
Gov may intervene in free markets to protect the environment. Can do this by:
Taxing companies for pollution and using revenue to clean areas affected
Regulating amounts of pollution
