Pack 10 Flashcards
what are two control limits to government intervention?
Regulatory capture: regulators who do not fulfil their roles due to the influence of firms in the industry - e.g bribing officials or even just using friendship to cloud judgement
Asymmetric information:
- firms in industry know more about the market than the policymaker = less effective
what do the CMA do and when are mergers referred to them?
Competition and Markets Authority: investigate whether significant takeovers/mergers are in public interest and that competition maintained in the industry, they can block UK mergers or require conditions to maintain competition
Will be referred if:
- involve/create a firm with 25% or more of market share
- involves merging with a firm with more than £70 million assets worldwide
what are the public interest criteria for the CMA?
- maintain and promote competition in the UK
- be in interest of consumers?
- lead to development of new products/lower costs?
- maintain/promote balanced distribution of industry/employment
- maintain/promote UK international competitiveness
Impact of gov intervention to control mergers
- lower prices for consumers
- improved choice/quality
- improved allocative and productive economic efficiency
However:
- time lag
- asymmetric information
- regulatory capture
- issue of global mergers and takeovers : need multiple authorities
difference between competition and contestability
competition: number of businesses in a market currently
contestability: threat of competition due to low barriers to entry/exit
impacts of privatisation
- transfer of assets from public to private sector
Impacts: - incentive to be more allocative/productively efficient due to profit-motive = boost consumer welfare - lower prices
- higher share ownership/increased business investment = raise finance through stock market = promote dynamic efficiency
However:
- creation of private sector monopolies: could reduce efficiency if little competition - especially if a natural monopoly
- need for regulation: costly
- issues of private sector businesses cutting costs: redundancies, reduced investment, more external costs to environment
what is deregulation?
- opening up of markets by reducing barrier to entry with the aim of promoting competition and contestability
- should mean market provides enough competition itself without the need for regulation
impacts of deregulation
Improve contestability/competition:
- need to compete by lowering prices and improving range/quality of goods/services = higher allocative/productive efficiency
- less need for costly regulation
However:
- may not create a competitive market, especially in the short-run due to:
- lack of new business entry: unable to compete with strong brand/loyal customers of existing firms
- lack of customer switching: so firms continue with monopoly power
- possible exploitation of customers
- not as good for natural monopolies
how can government promote small businesses
- lowering entry barriers by: providing finance, reducing legal requirements
- encouraging consumer switching: promotional campaigns/regulations so businesses make sure switching is easier
- improved education and training: fund business related training e.g T-levels
impacts of promoting small businesses
- improve contestability and so more competition = higher allocative and productive efficiency = lower prices = greater choice and higher quality goods as firms need to compete with smaller ones
However:
- will enough small businesses set up? - not enough finance/market too high risk?
- will small businesses be able to compete? - brand-loyalty, big firms just take them over?
- time lag
- cost implications for gov
what is competitive tendering and how does it improve contestibility/competition
- introducing competition amongst private sector firms which put in bids for work which is contracted out by the public sector
- gov write spec of what is required and every firm bids and lowest bid wins contract - gov try and make sure firms compete with each other to get lowest bid possible
- e.g rail franchises: West Coast main line used to be run by virgin trains now by Avanti west coast
Impact of competitive tendering
- to win contract businesses need to offer low prices and provide higher quality, more innovative approaches = greater allocative efficiency and incentive to improve productive efficiency
- means done at lower cost and with private sector expertise
However:
- collusive tendering: higher cost for gov
- impact of cost cutting: expense of workers or long term investment in quality of materials
- failure of the private sector business: if business makes sustained losses will need to shut down but this could damage project/service as transfer of contracts or gov may need to bail out (moral hazard issues)
- time lag
what are the four ways the government can intervene to promote competition and contestability
promotion of small businesses
deregulation
competitive tendering for gov contracts
privatisation
government intervention to control monopolies
price regulation
profit regulation
quality standards
performance targets
how can price regulation be used to control monopolies?
- acts as a surrogate for competition, as businesses will need to reduce prices in a similar way to if they were competing with a rival business
Types:
a) RPI-X: can increase prices by rate of inflation (RPI) minus perceived efficiency gains (X)
b) RPI + K: increase prices by rate of inflation plus K (capital requirement)
Impact: lower prices and lower profits for businesses, improved allocative efficiency due to lower prices closer to marginal cost, RPI-X improves productive efficiency as businesses need to reduce costs to maintain profits, RPI+K improves dynamic efficiency as allows investment to improve efficiency
Evaluation:
- information issues: hard to set correct levels of ‘X’ and ‘K’
- regulatory capture: if investigators less impartial if investigate same industry over time
- conflict between efficiency types: focus on cutting costs, for RPI - X may reduce dynamic efficiency, RPI+K may reduce allocative efficiency, as allows higher prices to promote investment
- time/cost of regulation
how can profit regulation be used to manage monopolies?
- limit on profits earned by firms to a fair rate of return, should improve allocative efficiency and lower prices by limiting price down to average cost
Evaluation:
- costs, imperfect information and regulatory capture
- lack of incentive to improve productive efficiency: lack of incentive to cut costs, as will not benefit from improved profits due to lower costs - lower productive efficiency
- reduced supernormal profits and dynamic efficiency: less to invest into R&D
- X-inefficiency: incentive to let wages, salaries and fringe benefits rise as firms can pass these onto consumers in form of higher prices and still meet profit regulation
how can quality standards be used to manage monopolies?
- must be met by firms to avoid fines and a damaged reputation
Impacts:
- high quality goods helping allocative efficiency by meeting consumer needs/wants
However:
- costs involved, imperfect information and regulatory capture can reduce effectiveness of the policies
- conflict with productive efficiency: cost implications of meeting quality standards = could lead to higher prices
- only focusing on quality: need to be used with other regulation to achieve other objectives, like lower prices
how can performance targets be used to manage monopolies?
Impact:
- allocative efficiency and consumer welfare: acting in the interest of consumers and so improving allocative efficiency
- dynamic efficiency: targets can be related to longer term improvements, e.g renewable energy for energy companies - incentivise firms to improve dynamic efficiency
Evaluation:
- conflict with productive efficiency: targeting improved performance conflicts minimising average costs and could lead to higher prices too
- firms getting around targets: to protect brand image, e.g train companies adding five mins on to each timetabled journey
how can restrictions be used to limit monopsony power of firms?
- use of independent regulators: could be given the power to force firms to change their buying practices, e.g through threat of fines
- minimum price schemes: ensure fair price for suppliers
- blocking merger/takeovers: if it will increase monopsony power
- encouraging new firms to enter the market: more buyers enter
Impact:
- supppliers should receive higher prices = higher profits = greater choice for consumers as more suppliers survive
- also higher wages and living standards, if measures put in place to protect employees
Evaluation:
- lower profits for monopsonist = reduced dynamic efficiency as less to reinvest
- also rising AC for monopsonist could reduce productive efficiency and possible higher prices of final products = reduced allocative efficiency
- cost of implementing/imperfect information/ regulatory capture
how can nationalisation protect employees and suppliers?
- transfer of assets/firms from private to public sector
Impacts:
- greater employment and job security: decreased chance of shutting down as can continue to run a loss making business unlike private sector
- higher wages: not aiming to maximise profits so should be able to have higher costs
- knock on effects for protecting suppliers. as if businesses more likely to remain in business = more derived demand for suppliers
Evaluation:
- conflict with economic efficiency: lack of profit motive = less productive efficiency (higher costs) and allocative efficiency (higher prices), could damage long term employment prospects if industry becomes uncompetitive
- cost/budget implications for the government: need to purchase private firms: short term cost, running costs: more significant if do not have expertise/incentive to run efficiently
