3.6.1 Government intervention

what are the ways the government can intervene for businesses

• intervention to control mergers

• intervention to control monopolies

• intervention to promote competition and contestability

• intervention to protect suppliers and employees

what is the CMA

• competition and markets authority

  • uk government regulator tasked with ensuring the creation of monopoly power is avodied and that consumers and not exploited in markets

how can consumers be exploited

higher prices, less choice, poor quality products

how to control monopoly power 

prevent it forming in first place

role of the CMA

to monitor merger activity with the aim of preventing any single firm gaining more than 25% market share

if there are concerns about the merger then the CMA has the authority to stop it from happening or they can allow it to happen but insist the new firms sells certain assets which could limit its market share

CMA example

they launched an investigation into the merger of 2 companies which produce foam used in bedding and cleaning products as they believed it would lead to higher prices and less choice

types of intervention to control monopolies

• price rgulation

• profit regulation

• quality standards 

• performance targets

price regulation to control monopolies

• Monopolies aim to produce at the profit maximisation level of output (MC=MR)

• This results in higher prices and restricted output in the market

• The CMA uses maximum prices to lower prices and increase output

• One way in which they determine where the maximum price should be is to identify the point of allocative efficiency and set the maximum price where AR=MC

• This strategy is often used on natural monopolies

• Firms will make less supernormal profit than before, especially when any price increases are set below the rate of inflation: RPI - X

profit regulation to control monopolies

• The CMA may choose to limit the supernormal profit a monopoly can earn

• They do this by calculating the firm's total costs and then adding a percentage of profit to it

• However, it is a very contentious policy as

  • Costs are difficult for the CMA to calculate

  • Firms often try to inflate their perceived costs so as to make more profit than allowed

  • Monopolies have no incentive to lower costs, so if costs are higher than they would be in perfect competition, consumers still end up paying higher prices

  • Even with this policy in place, natural monopolies seem to post record profits year on year

quality standards to control monopolies

• One way to maximise profit is to reduce the quality of the raw materials, which reduces the quality of the end good/service

• If there are no substitutes then this is a likely outcome

• Regulators can step in to insist that certain quality standards are met

• It can be difficult for them to know what the potential quality of a product is or what standards to impose

• Firms push back on these quality standards as they reduce their supernormal profit

performance targets to control monopolies

• Regulators can also set performance targets so as to raise the quality of the service and improve customer satisfaction

• This is often seen in the rail industry where targets are set based on the percentage of trains running on time 

why does the water industry in uk need to be regulated

natural monopoly that was privatised in 1989 so regulated to prevent price increases and sewage spills

types of intervention to promote competition and contestability 

• promotion of small businesses

• deregulation

• competitive tendering

• privatisation

promotion of small businesses to promote competition and contestability 

providing tax incentives or subsidies to small firms can help increase the number of new entrants into industries and thus promote competition

deregulation

process of removing government controls from markets in order to increase competition

deregulation to promote competition and contestability 

Government regulations can increase industry costs or act as a barrier to entry. Removing regulations can promote competition, which will also increase the contestability in the market

competitive tendering

occurs when a government draws up a specification for a good/service it wants to provide and receives bids from private firms to provide it

Competitive tendering for government contracts to promote competition and contestability 

as a major provider of goods/services in the economy, the government could choose to manufacture many products itself, and this would decrease competition. By outsourcing the supply of these products, it generates more private sector activity and increases competition

privatisation

transfer of ownership and controlof firms/assets from the state to the private sector

privatisation to promote competition and contestability 

Firms are hesitant to enter an industry when the dominant firm is owned by the government and has access to all of the government's resources. Privatisation encourages new entrants to the industry as they feel they can compete more effectively with private firms, which perhaps have fewer resources available to them

example of privatisation 

In April 2022, the UK Government confirmed that Channel 4 would be privatised

how can the govenment intervene to protct suppliers

• anti monopsony laws and fine if breachec occur

• encourage firms to self regulat

• appoint a regulator to monitor practices in industr

• subsidise firms suffering from abusive monopsony power

• set min prices

• nationalisation

nationalisation

occurs when the government takes control and ownership of firms which were in the private sector

example of nationalisation 

In 2024, the Labour government pledged to nationalise the rail network within 5 years.

government intervention to protect employees

• national minimum wage

• Legislation on health and safety, working hours and employment conditions, e.g. maternity pay

• ermitting trade unions to operate in the economy

• Encouraging firms to adopt best practice and draw up company codes of conduct towards their employees. This is a form of self-regulation

example of country banning unions as believe anticompetitive

singapore

privatisation advantagrs

• increased compeittion improves efficiency 

• improves resource allocation-have to react to market signals og supply and demand

• enable building of important facilities that government may not be able to afford to build

• lower taxes in short run as government wont pay for new facility 

• gov gains revenue from seeling firms

privatisation disadvantages

• public monopoly likely to become private monopoly so measures taken to avoid this

• less focus on safety and quality as more on profits and costs

• need regulation so cost for taxpayers

• cost more in long run

• higher taxes for future generations

deregulation advantages

• improves resource allocation as more firms in market

• used alongside privatisation of a puvlic monopoly to prevent privatised firm becomign private monopoly

• improve efficiency by reducign amoutn of red tape and bureaucracy

disadvanatges of deregulation

• hard to deregulate natural monopolies as reuqire large infrastructures

• cant fix other market failures

• less saferty and protection for consumers

adv and dis of nationalisation

• investment needed in long term

• natural monpoly better to be run by state

• gov will consider externalities

• gov will guarantee a minimum level of service for those who risk being cut of from the service

• suffer from principal agent problem and moral hazard as managers know any loss is covered by goevrnment

• experience x inefficiency leadint to high prices fo consumers

• influences by gov decisions and may not have enough money to invest

nhs as nationalisation

nationalised industry which suffers from lack of funsing and lack of compeition both of which lead to poor quality