the impact of govt intervention

Question 1

recall what government intervention affects

Answer 1

prices
profit
efficiency
quality
choice

Question 2

how may govt intervention affect prices?

Answer 2

• govts can prevent monopolies charging consumers excessive prices which might result in a loss of allocative efficiency
• this can make services from utility companies more affordable → beneficial to low and fixed income households
• limiting how much a firm can increase its prices by encouraging the firm to become more efficient
  
  • this is so that they can lower their costs and increase their profit margins
• if corporation tax is high, firms might pass the extra costs onto consumers, resulting in higher prices, rather than losing their own profits

Question 3

how may govt intervention affect profit and how can this be evaluated?

Answer 3

if governments imposes strict price caps, investment could be limited since the amount of profit that a firm makes is restricted

Question 4

how may govt intervention effect efficiency with reference to the diagram?

Answer 4

• the diagram shows where public sector firms operate
• private sector firms are more likely to operate at Q1 P1 which is the profit maximising level of output and price
• sector firm is more likely to operate at Q2 P2 which is the allocatively efficient level output (AR=MC)
  
  • therefore, government intervention might lead to an increase in economic efficiency since the objectives change from profit maximisation to maximising social efficiency

Question 5

how would a free market economist argue against govt intervention to increase efficiency of firms and why?

Answer 5

• free market economists argue that by operating in a competitive environment, firms have an incentive to become efficient
• this is because they are forced to lower their average costs to profit maximise
• this makes private sector firms more productively efficient
• they might also argue that private sector firms have to produce the goods and services that consumers want in order to keep earning profits
• this might increase allocative efficiency

Question 6

how does govt intervention affect quality?

Answer 6

• governments can ensure firms are meeting minimum targets which ensures firms focus on increasing social welfare
  
  • e.g firms in the gas and electricity markets are regulated to ensure vulnerable groups are kept warm during the colder months
• firms which profit maximise might compromise on quality
  
  • however if private sector firms have the expertise and knowledge which the government might not have, then they might be able to produce goods and services of a higher quality

Question 7

how may govt intervention affect choice?

Answer 7

• if governments regulate monopolies and encourage the start up and growth of SME (small and medium sized enterprises), consumer choice in the market widens, since there are more firms competing
• a stringent price ceiling might force some suppliers out of the market which reduces the quantity supplied and narrows choice consumers
• if governments can reduce the price of a good or service it can allow those on low and fixed incomes to access goods that they previously couldnt afford

Question 8

recall the limitations of govt intervention

Answer 8

regulatory capture
asymmetric information

Question 9

what is regulatory capture?

Answer 9

there is a risk of regulatory capture which is when regulators start acting in the interests of the company due to impartial information rather that in the interests of the consumer

Question 10

what is the effect of regulatory capture

Answer 10

• regulator may become more empathetic and see things from the employees perspective
• this removes impartiality
• this information disadvantage is a problem for regulators
• large corporations can invest large amounts in learning how to gain the support of their regulator
• this is an example of govt failure

Question 11

why is asymmetric information a limitation of govt intervention?

Answer 11

• can make it hard to determine what level a price cap should be at
• hard to determine govt policies when intervening where there is a market failure
• without sufficient information govts could make poor decisions and could lead to a waste of scarce resources

Question 12

why may a govt be X-inefficient and what is the effects of this?

Answer 12

• govt may be X-inefficient as they have no incentive to be efficient due to the lack of competition
  
  • this may push up prices and reduce quantity of a good
  • private sector may have more expertise which the govt may not have
• govt are likely to offer less choice since theres only one company producing the good
• govt may regulate too strongly which can push up costs and lead to inefficiency

Question 13

show the effect of govt intervention on efficiency on a diagram

Answer 13

Question 14

why may it be difficult for the govt to determine a policy

Answer 14

• hard to determine govt policies when intervening where there is a market failure
  
  • since the extent to which the market fails involved a value judgement
  • e.g its hard to decide what the cost of pollution to society is
• different individuals will put a different value on it depending on their own experiences