2. Government Intervention to Control Monopolies

Why may the government want to intervene with monopolies?

They have significant monopoly power, often resulting in market failure.

(e.g. inefficiencies)

What types of regulation can be used to control monopolies?

1. Price cap-regulation.

2. Profit regulation.

3. Quality standards and performance targets.

What is price-cap regulation?

When regulators limit price increases, or order firms to cut prices by a certain amount.

What are the main types of price-cap regulation?

1. RPI

2. RPI - X

3. RPI +/- K

What does RPI - X represent?

RPI (inflation)% - Efficiency gains%

What does RPI +/- K represent?

RPI (Inflation) +/- % extra profit to fund capital investment.

Give 5 advantages of price-cap regulation.

1. Incentivises firms to be efficient.

2. Different depending on the industry.

3. Regulator can act in consumers best interest.

4. Can increase allocative efficiency.

5. Electricity price fallen in the past: proof of success.

Give 5 disadvantages of price-cap regulation.

1. Regulators may underestimate potential cost savings of firms.

2. Regulatory capture.

3. Regulators may be too strict, preventing investment.

4. Fewer incentives to cut costs as regulator may increase value of X.

5. Doesn't consider performance targets and quality.

Define 'regulatory capture'.

A form of govt intervention where a regulatory agency acts in the interest of dominant firms instead of the public.

What is profit regulation?

When the rate of return a firm can make from its capital employed is capped.

Give 4 advantages of profit regulation.

1. Ensures survival of firms.

2. Encourages investment.

3. Prevents high prices.

Give 3 disadvantages of profit regulation.

1. Little incentive to innovate.

2. Hard to pick monetary value of profit.

3. Little incentive to cut costs and be more profitable.

What are performance target?

Give an example.

When regulators set the standards/ targets of a service.

e.g. NHS, trains.

What do performance targets do?

It prevents firms from trying to cut costs by lowering quality and standards.

What happens if firms do not meet performance targets?

They can be fined.

Give an advantage of performance targets.

Protects consumer welfare.

e.g. quality

Give 5 disadvantages of performance targets.

1. Targets may be too weak.

2. Firms may alter behaviour just to meet targets. e.g. more train time lenience.

3. Regulatory capture.

4. Increases costs for firms.

5. Administrative costs.