3.6 Government intervention

Who works to promote competition in the UK?

The Competition and Markets Authority (CMA)

How can the government intervene in UK markets? 5

• control mergers

• Control monopoies

• Promoting competition and contestability

• Protecting suppliers and employees

• Privatisation and nationalisation

How can monopolies be controlled? 4

• Price regulation (force them to charge a price blow max price)

• Profit regulation (aims to encourage investment)

• Quality standards (electricity generators forced to have good capacity so no blackouts)

• Performance targets (punctuality targets trains)

How does the government control mergers?

Considers whether there will be a substantial lessening of competition

How might the government promote competition and contestability? 3

• Promotion of small business (tax incentives, subsidies, grants)

• Deregulation (efficiency increases)

• Competitive tendering (provision of public goods can be contracted out, PFI)

How might the government protect suppliers and employees? 2

• Restrictions on monopsony power

• Workers’ rights

What are the advantages of privatisation? 3

• encourages greater competition

• Managers become more accountable

• Reduces government interference

What are the disadvantages of privatisation? 2

• firms in natural monopolies may abuse their positions

• Industries that are important (electricity, water and transport) may be ran ineffectively by the private sector

What are the advantages of nationalisation 3

• investment is needed for the long term, but in privatisation investment is only short term

• Natural monopolies should be ran by the state

• The government will consider externalities

What are the disadvantages of nationalisation? 2

• Nationalised industries may suffer from moral hazard

• Government may not have enough to invest

Where would a nationalised firm produce in a natural monopoly?

Allocative efficiency (P=MC)

Where would a privatised firm produce in a natural monopoly?

MR=MC (Profit Maxx)

What are the impacts of government intervention? 3

• Monopolies prevented from charging excessive prices

• Consumers receive fair prices

• Efficiency can be increase (contestability/competition)

What are the limits of government intervention? 2

• Regulatory capture (impartiality can be removed)

• Asymmetric information (incorrect information can be supplied)