3.6 Government intervention

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3.6.1 Why do governments intervene?
To control mergers, to control existing monopolies, to promote competition and contestability. This improves economic outcomes for society.
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3.6.1 What is the Competition and Markets Authority (CMA)?
They oversee the UK competition policy. They focus on monopolies, mergers, restrictive trade practices and promoting competition.
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3.6.1 Why do governments intervene to control mergers (or takeovers)?
A merger is investigated if it will result in market share greater than 25%. The aim of preventing two large companies merging is so they do not exploit their customers by raising price, offering poorer quality service and reducing choice.
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3.6.1 How to governments intervene to control monopolies?
Compulsory break up, windfall taxes on supernormal profits, price controls, nationalisation, privatisation, deregulation, enforcing quality standards, setting performance targets
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3.6.1 What is RPI-X?
A price below profit maximising price using the RPI-X formula. X represents the expected efficiency gains of the firms and the aim is to ensure firms pass on their efficiency gains to consumers.
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3.6.1 What is RPI-K?
Price cap. K is for investment.
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3.6.1 What other price caps could the government use?
Maximum prices could be set where the price is equal to the MSC, ensuring monopolies are allocative efficient. However, it is difficult for governments to know where they should set the price as they do not know the exact allocative efficient output.
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3.6.1 How are profits regulated?
In the USA, ‘rate of return’ regulation is used where prices are set to allow coverage of operating costs and to earn a ‘fair’ rate of return on capital invested. This encourages firms to invest in capital to lower AC.
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3.6.1 What are problems with profit regulation?
It is also criticised since a reduction in costs will not improve the firm’s situation and so there is little incentive to be efficient and regulators may suffer from asymmetric information.
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3.6.1 How do firms monitor quality standards?
Monopolists will only produce high quality goods if this is the best way to maximise profits. The government can introduce quality standards, which will ensure that firms do not exploit their customers by offering poor quality.
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3.6.1 What are potential problems monitoring quality standards?
The problem is that it requires political will and understanding to introduce.
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3.6.1 How are performance targets regulated?
They could set targets over price, quality, consumer choice and costs of production. It will help firms to improve their service and lead to gains for customers.
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3.6.1 What are problems with performance targets?
Firms will resist the introduction of targets. They will also attempt to find ways to meet targets without actually improving. Governments need to ensure that fines are strong enough that firms at least work to ensure targets are met.
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3.6.1 How is competition promoted?
Promotion of small businesses, deregulation, privatisation, competitive tendering.
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3.6.1 How are small businesses promoted?
The government can give training and grants to new entrepreneurs and encourage small businesses through tax incentives or subsidies. It increases innovation and efficiency and incumbent firms will no longer be able to be X-inefficient.
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3.6.1 What is deregulation?
This is the removal of legal barriers to entry to a previously protected market to allow private enterprises to compete. This will increase efficiency in the market by allowing greater competition as more firms can enter and conduct more activities.
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3.6.1 What problems can deregulation cause?
It can lead to poor business behaviour.
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3.6.1 What is competitive tendering?
The government can contract out the provision of a good or service to private companies e.g. private firms could be employed to run hospitals. These are called Private Finance Initiatives (PFI)
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3.6.1 What are problems with competitive tendering?
However, it may not always be the most cost effective way and the process of collecting bids is costly and time-consuming . The private sector may not aim to maximise social welfare and could use cost-cutting methods that reduce quality.
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3.6.1 How do governments intervene to protect suppliers and employees?
Restricting monopsony power on firms, workers rights, privatisation and nationalisation.
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3.6.1 How is monopsony power restricted?
The government can prevent these by passing anti-monopsony laws which make certain practices illegal and can introduce an independent regulator who will force monopsonists to buy fairly. Fines and minimum prices can also be implemented
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3.6.1 How do workers rights protect employers?
The government protects employees through health and safety laws, employment contracts, redundancy processes, maximum hours at work and the right to be in a trade union.
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3.6.1 What are some problems associated with workers rights?
If workers’ rights are too strong, employers will be unwilling to take on new workers due to the extra cost of employing these workers.
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3.6.1 What is privatisation?
The sale of government owned assets to the private sector.
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3.6.1 What are advantages of privatisation?
Raises revenue for the government. Promotes competition and efficiency. Pressure for firms to act in the public interest.
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3.6.1 What are disadvantages of privatisation?
Exploitation of monopoly power. Short termism - cost cutting to maximise profits rather than long term investment projects. Firms may ignore externalities.
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3.6.1 What is nationalisation?
Transfer of assets from the private sector to the public sector.
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3.6.1 What are advantages of nationalisation?
More likely to factor in externalities. More likely to be allocatively efficient.
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3.6.1 What are disadvantages of nationalisation?
Lack of dynamic efficiency. Best managers and leaders are found in the private sector where financial rewards may be higher.
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3.6.2 What are impacts government intervention?
Prevent monopolies charging excess prices to make them fairer. It can lead to efficiencies by promoting competition.
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3.6.2 What are limitations of government intervention?
Regulatory capture and asymmetric information,
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3.6.2 What is regulatory capture?
When the regulator is captured by the firm/industry they are regulating. The fact that the regulator will often meet with the firm’s employees will mean they become more empathetic which will remove impartiality and weakens their ability to regulate.
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3.6.2 What is asymmetric information?
This is where regulatory bodies have to use information provided to them by the industries when setting price targets etc. so they can provide inaccurate information.
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Card 2

Front

3.6.1 What is the Competition and Markets Authority (CMA)?

Back

They oversee the UK competition policy. They focus on monopolies, mergers, restrictive trade practices and promoting competition.

Card 3

Front

3.6.1 Why do governments intervene to control mergers (or takeovers)?

Back

Preview of the front of card 3

Card 4

Front

3.6.1 How to governments intervene to control monopolies?

Back

Preview of the front of card 4

Card 5

Front

3.6.1 What is RPI-X?

Back

Preview of the front of card 5
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