Impacts of government intervention

Question 1

What is the impact of government intervention on prices

Answer 1

Stops monopolies charging high prices so reduces prices which benefits the consumer

Question 1

What is the impact of government intervention on profit

Answer 1

Stops monopolies obtaining large amounts of supernormal profit by limiting or taxing them so profit is reduced

Question 2

What is the impact of government intervention on choice

Answer 2

Increases consumer choice as intervention aims to promote competition and innovation so more products will be offered
—> Nationalisation offers less choice

Question 3

What is the impact of government intervention on efficiency

Answer 3

Increase all efficiencies by encouraging competition, nationalised industries will also be allocatively efficient
—> strong regulation can reduce efficiency and push costs up

Question 4

What is the main criticism of nationalised industries

Answer 4

They have no incentive to reduce costs as they are covered by the government so x inefficiency is increased which may push prices up and reduce quality

Question 5

What is the impact of government intervention on quality

Answer 5

Should increase quality as the government should aim to maximise social welfare
—-> x inefficiencies caused by governments can reduce quality

Question 6

What are the limits to Government Intervention

Answer 6

• Regulatory Capture
• Asymmetric information
• Large firms and monopolies have political power equal to governments

Question 7

Regulatory capture

Answer 7

Regulatory bodies are pressured by large firms into working in their interest rather than that of the government and consumer

Question 8

Why may regulatory capture be common

Answer 8

• People working for regulators often will have worked in the industry so may have connections and biases
• Large corporations have huge amounts to invest into learning how to manipulate regulators
• regulators and firms meet often so deals can be struck up

Question 9

Famous example of regulatory capture

Answer 9

2010 Vodafone captured HMRC and negotiated a tax reduction from 7bn to 1bn

Question 10

Asymmetric information for regulators

Answer 10

Regulators use information provided by firms they regulate so firms may lie so they can charge higher prices, RPI - X may be set incorrectly resulting in welfare loss