3.6.2 The impact of government intervention

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8 Terms

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What are the desired outcomes of government intervention

  • affordable and stable prices

  • permitting enough profits to keep firms in the industry but limiting how much they make to protect household incomes

  • efficiency-reducing waste of valuable resources

  • quality -fit for purpose

  • choice

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why does the government wnat to make sure theres choce

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)

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what are the limits to government intervention

  • regulatory capture

  • asymmetric information

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regulatory capture

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

  • 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

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lobbying

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

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example of lobbying

  • 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


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assymitric information as limit to government intevrnetion

  • 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

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examle of cartel

elevator market operated a cartel for many years in Europe from 1995 to 2004