The impact of government intervention

Question 1

Give two arguments for an energy price cap

Answer 1

.Cap protects consumers from over charging due to the power of dominant suppliers who make high profits
.High fuel prices hurt lower income families who are at greater risk of fuel poverty
.Price cap will encourage energy suppliers to increase productive efficiency
.The cap can be temporary and lifted if competition improves

Question 2

Give an argument against imposing an energy price cap

Answer 2

.Price cap may hurt competition by reducing profits and therefore lowering the incentive for new challengers into the industry
.Price tend to gravitate towards the cap so average prices for customers might actually increase rather than fall
.Fall in profit will mean less investment in renewables
.Better long-run strategy is to focus on nationwide housing insulation programme to improve energy efficiency

Question 3

Give two limits to government intervention

Answer 3

.Regulators may limit government innovation in fast growing markets
.Capping prices might prevent new firms from entering a market
.Regulation becomes bureaucratic and highly costly
.They lack the powers to be truly effective in protecting customers
.Regulators might be behind the curve with new technologies
.Frequent rule changes can stifle business capital investment

Question 4

When can regulatory failure occur?

Answer 4

Regulatory failure can occur when intervention in markets is ineffective in meeting the stated aims or leads to a deeper and more persistent market failure than what there was previously