The Impact of governement intervention (2)

The desired outcome of government intervention

Prices	Profit	Efficiency
Affordableand stable prices	Permitting enough to keep firms in the industry (normal profit) but limiting how much they make so that household income is protected	Reducing wastage of valuable resources and one of the best ways to achieve this is by developing rigorous competition
Quality	Choice
Ensuring products are fit for purposeand contribute to a better standard of living	Wider choice improves the standard of living and also helps to improve product quality. More choice also generates more economic activity in an economy and increases the gross domestic product (GDP)

Limits to Government Intervention

• Government intervention is not always effective. Two of the main reasons for this are the existence of regulatory capture and asymmetric information

Regulatory Capture

• Regulatory capture occurs when firms influence the regulators to change their decisions/policies to align more with the interests of the firm

  • Firms spend millions lobbying (The process of engaging with decision makers in government to attempt to influence the decisions they make which impact the operating environment of the firm doing the lobbying. Often specialist firms (who are well connected in government) represent the interests of private firms) regulators directly - or in many cases lobbying politicians who can issue instructions to the regulators e.g in 2021 the former UK Prime Minister, David Cameron, was caught in an embarrassing case of lobbying for a failed financial venture by a firm called Greensill Capital

• Some lobbying activity is corrupt and there is a fine line between influencing activity and bribing. The UK Government has an agenda to improve the transparency of any lobbying activity

• Naturally, regulatory capture can completely prevent fair outcomes in the markets concerned

Asymmetric information

• Often governments believe they are making the best decision in order to meet their aims

• Many times it is not the best decision due to the fact that the government or regulators either do not have the full and relevant information - or they do not understand the market they are trying to regulate e.g. many financial markets are fast moving and incredibly complex

• This existence of asymmetric information has been responsible for some spectacular government failures