regulation and policy Flashcards
who enacts competition policy
-main UK regulator - competition and markets authority (CMA)
-European competition commission (EU)
regulatory bodies (CMA)
specialist regulators
-ORR (rail regulator)
-CAA (airports) etc.`
aims of competition policy
-prevent excessive pricing
-promote competition
-ensure quality standards and choice
-regulate natural monopolies and ensure effective privitisation of natural monopolies
-promote technological innovation
when will competition authorities intervene
-antitrust and cartel agreements (fixed prices and restrict output to deter entry of new firms
-investigate mergers, if any merger creates a merger greater than 25%
-liberalise highly concerntrated markets
-monitor state aid control, make sure subsidies dont distort competition in another country/ industries/ other firms
monopoly regulation
price regulation
-prices not allowed to increase the next year beyond RPI inflation
-RPI - x (airport charges), restrict prices below RPI where x = percentage promoting incentive for efficiency savings by cutting costs
-RPI +/- k, k = % where enough profits are made to allow capital investment
monopoly regulation
price regulation
disadvantage
-level of x/k - information failure, could be set too high or too low and we assume regulators have perfect information
-costs(increase in tax), incentive to keep x down
-regulatory capture (bias regulators) - government failure
monopoly regulation
quality control/ performance targets
e.g. trains, gas and electricity, NHS
monopoly regulation
quality/ control/ performance targets
disadvantages
-unintended consequences (performance decreases, e.g. NHS, GP rushing work)
-game the system - as trains only allowed few delays, there will be extended train times
monopoly regulation
profit control covering
profit control covering costs and adding % returns on capital employed
short term cost, long term return
monopoly regulation
price control covering
disadvantages
-assymetric information (over report capital employed)
-incentives to increase costs
-incentive to over employ capital
monopoly regulation
windfall taxes on profit
taxing monopoly profit increasing costs of production, shifting MC upwards increasing prices, decreasing quanitity
monopoly regulation
windfall taxes on profit
disadvantages
-worsens monopoly outcomes
-tax evasion/ avoidance
-less innovation
-under-reporting on profit
monopoly regulation
merger policy
> 25% = investigation, break merger against public interest by selling of stores in areas where competition is distorted
monopoly regulation
marlet liberalising policies to promote competition
-privatisation
-deregulation
-reducing trade barriers
evaluation of monopoly regulation
government failue-
-level of information
-costs and benefits
-regulatory capture
benefits of monopoly
advantages of privatisation
-increased allocative efficiency, strive to produce G/S of increased quality that consumers want
-decrease in x inefficiency - less waste as firms will decrease costs to remain competitive
-efficiency incentive which drives dynamic efficiency (maybe lower prices over time)
when a private sector replaces a public sector
a private sector will run a business much more efficiently as they have a profit motive
disadvantage of privatisation
-limited competition - productive and allocative inefficient if competition doesn’t come
-loss making services cut even if socially desirable
-loss of natural monopoly and loss of EoS benefits = productive inefficiency
pros and cons of privatisation depends on
-level of competition post privatisation
-amount of government regulation, tight = more competitive, lose = possible monopoly
gov regulation may force firms to produce services that is socially desirable
private firms dont take into account positive/negative externalities due to self interest, gov make them pay through tax
deregulation
when governments reduce legal barriers to entry in given industries to incentive more firms entering the market promoting competition and efficiency
advantages of deregulation
-more firms increases consumer choice - incentivisation allocative efficiency to satisfy consumers and stay ahead of competition
-increase produce and x - efficiency - incentive min costs and max profits
-increased dynamic efficiency - invest anything to get ahead
disadvantages of deregulation
-loss of natural monopoly, increases AC and decreases productive efficiency, also wasteful duplication of resources - alloocative inefficiency
-formation of oligopolies and local monpolies possibly increasing prices
pros and cons of deregulation depends on
-short run vs long run
-height of other barries to entry
-level of government regulation
nationalisation
the process of taking an industry into public ownership
agreements in favour of nationalisation
-state run monopoly has greater potential for EoS (PE, decrease in price and AC)
-more focus on service provision as gov look to max social welfare, so needs and wants of society are met - allocative efficiency at a low price
-less likely to be market failures arising from externalities as gov look to max socail welfare and doesnt ignore social costs/ benefit - AE
-public sector can be a vehicle for macro-economies control, manipulate wages to control inflation/ control employment levels in a recession
arguements against nationalisation
-diseconomies of scale, risk is large for huge state to run a monopoly (coordination, communication etc.) increasing AC/ loss of PE/ increase prices
-lack of incentive to minimise cost - increase in costs increases prices
-complacency/ wasteful production - increases cost, x -inefficiency
-lack of supernormal profits - dynamic inefficiency, no innovation, R+D gains
-highly expensive, burden on tax payer (opportunity cost)
-higher prices due to low comp and lack of competative drive - allocative inertia
-greater risk of moral hazard - individuals who dont take risks bare costs (politicians and tax payers)
-politician priorities
evaluation points for nationalisation
-funding vs delivery of key public services
-PPPs better (public private partenership)
-role of regulation
-competition is private sector (high comp not necessary, low comp maybe)
-size and objective of private firms (large EoS benefit)
invention
creation of a new idea without it necessarily becoming a commercial reality
innovation
transforming an invention into a commercial reality
creative destruction
innovation/ invention of new products destroys previous markets and pre-existing businesses and jobs
e.g. air Bnb destroying traditional hotels/ online TVs/ music streaming and dvds and tapes
what can innovation/ inenvtion lead to
more capital or labour intensive production
car - more cpaital
-medical - labour
over the last 40/50 more job have been created due to technology
reduces costs of production
more cpital/ labour intensive production graph
-reduces CoP over time
-LRAC decreases
-specialist capital brought in achieving specialist EoS
-increase in quantity, MES takes piece or greater level of quality, more EoS to take place
efficiency gains from innovation/ invention
increase in PE and AE
increase in dynamic efficiency
how market structures change due to innovation/ invention
-increase in no. firms lower BtoE
-more competative
-product homogeneity = greater variety
-knowlede increases
