Microeconomics part 6- Revisiting Market Failure and Government Intervention in Markets Flashcards
Windfall tax definition:
Tax on a firm if it suddenly males a large, unexpected profit as a one off
What type of costs do windfall taxes increase?
- Average costs but not marginal costs
- It is a fixed cost
What type of costs do specific taxes increase?
- Average and marginal costs
- It is a variable cost
Who pays windfall taxes?
Particular firms
Who pays specific taxes?
All firms in an industry
Competition policy definition:
The part of the government’s microeconomic policy and industrial policy which aims to make product markets more competitive. It comprises policy towards monopoly, mergers and restrictive trading practices.
What does competition policy involve?
-End abuse of monopoly power
-Lower costs of production (MES)
-Improve all types of efficiency
-Reduce supernormal profit
-Lower prices
-Lower barriers to entry
These would all happen if barriers to entry were lowered
What does the CMA (competition and markets authority) do?
Attempts to identify and rectify cases of abuse of monopoly power
Why is it hard for the CMA to identify abuses of monopoly power?
- It just looks like good business sense
- Firms would try and hide it
How does the CMA identify abuses of monopoly power?
- Concentration ratio
- Consumer and trade complaints
- Compare prices
- Market structure
What are the problems with the CMA?
- Regulatory capture
- Difficult to identify abuses of monopoly power
Benefits of the CMA:
- Threat
- Bad press
- Fine
What can the European commision intervene with?
Mergers
What can the CMA do with large firms?
Break them up
Restrictive trading practices (collusion):
- Price discrimination (acts as a barrier to entry as existing firms are able to charge lower prices)
- Refusal to supply a particular retailer
- Full-line forcing
- Cartel
- Price fixing
- Market sharing
What are the costs of competition policy?
- Costly to investigate
- Opportunity cost
- Government failure- policy myopia (short- term view), political self-interest
- Regulatory capture
Benefits of competition policy:
- Should increase competition
- Should lower prices
- Should lower barriers to entry
- Should increase choice
- Should increase quality
Public ownership definition:
Owned by the government
Arguments for public ownership:
- Government not driven by profit alone
- Allocative efficiency
- Can earn revenues
- Economies of scale
Arguments against public ownership/ nationalisation:
- Costly to buy back
- Lack of profit motive
- X-inefficiency- government known for excess bureaucracy (red tape)
- Any argument against natural monopoly
Advantages of privatisation:
- Revenue raising
- Reduces public spending and could earn tax revenue
- Profit motive
- Productive efficiency
- Allocative efficiency- quality should increase to get people to buy it
- Dynamic efficiency
Disadvantages of privatisation:
- Once it’s gone it’s gone
- No guarantee it would increase competition. Could lead to monopoly abuse
- Short-term profit maximisers. Loss of long-term investment
- Price could rise- loss of consumer welfare
- No incentive for private sector to internalise externalities
- May need regulation
- Some argue they’re sold too cheaply
Regulation definition:
The imposition of rules an other constraints which restrict freedom of economic action
What regulatory bodies do:
- Decide output
- Set limits on price rises
- Check standards
- Monitor and enforce
- Decide % of supernormal profits that should be spent on innovation
- Decide which improvements need to be made
External regulation definition:
An external agency lays down and enforces rules and restraints (CMA)
Self regulation definition:
A group of individuals or firms regulating themselves
Advantages of regulation:
- Reduces monopoly power
- Can impose government objectives
- Can limit supernormal profits
- Incentivises innovation
Disadvantages of regulation:
- Costly
- Regulatory capture
- Can raise costs of production to firm
- Disincentivises innovation
Deregulation definition:
The removal of previously enforced regulation
How does deregulation increase contestability?
Lowers the barriers to entry
Economic liberalisation definition:
Opening up markets to private ownership and competition, and reducing government intervention in the economy
Types of economic liberalisation:
- Contractulisation: Services which were previously owned by the public sector e.g. road cleaning are put to private sector tender and then provided by private sector firms
- Marketisation: The provision of goods and services is shifted from the non-market sector into the market sector of an economy
Public-private partnership definition:
Partnership between the private and public sectors to provide public services
Private- finance initiative definition:
The government seeks tenders from the private sector for designing, building, financing and running infrastructure projects
Types of market failure:
- Public good
- Positive and negative externalities
- Merit and demerit goods
- Monopoly
- Inequalities
- Imperfect information
- Market immobility
Tragedy of the commons definition:
Occurs when there are no property rights assigned to a resource. Individuals maximise their own utility with no regard for its sustainability
Property rights definition:
The exclusive authority to determine how a resource is used
Problems with extending property rights:
- Pollution of the environment crosses borders
- Difficult to assess the value of these rights
- Difficult to divide, allocate property
- Difficult to police, monitor
Free rider problem definition:
Those who benefit from resources, goods, or services do not pay for them
What does the free rider problem lead to?
-Missing markets
-State provision
-Over consumption
Tragedy of the commons
How the government can intervene to correct environmental market failure:
- Taxes
- Subsidies
- Pollution permits (cap and trade)
- Closing the information gap
- Fines
- Regulation
- Privatisation/nationalisation
Advantages of pollution permits:
- Should reduce pollution/ carbon emissions
- Rewards efficiency
- Profit motive
- Should result in innovation
Disadvantages of pollution permits:
- Over-allocation of carbon quotas and freedom to allocate
- Uncertainty of future of the scheme makes it less likely that businesses will invest in greener technologies
- Imperfect information
- Regulatory capture
