Impacts of government intervention Flashcards
What is the impact of government intervention on profit
Stops monopolies obtaining large amounts of supernormal profit by limiting or taxing them so profit is reduced
What is the impact of government intervention on choice
Increases consumer choice as intervention aims to promote competition and innovation so more products will be offered
—> Nationalisation offers less choice
What is the impact of government intervention on efficiency
Increase all efficiencies by encouraging competition, nationalised industries will also be allocatively efficient
—> strong regulation can reduce efficiency and push costs up
What is the main criticism of nationalised industries
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
What is the impact of government intervention on quality
Should increase quality as the government should aim to maximise social welfare
—-> x inefficiencies caused by governments can reduce quality
What are the limits to Government Intervention
- Regulatory Capture
- Asymmetric information
- Large firms and monopolies have political power equal to governments
Regulatory capture
Regulatory bodies are pressured by large firms into working in their interest rather than that of the government and consumer
Why may regulatory capture be common
- 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
Famous example of regulatory capture
2010 Vodafone captured HMRC and negotiated a tax reduction from 7bn to 1bn
Asymmetric information for regulators
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
What is the impact of government intervention on prices
Stops monopolies charging high prices so reduces prices which benefits the consumer
