3.1.5.8 GOVERNMENT INTERVENTION IN MARKETS

What is competiton policy?

The government regulations and legal frameworks established to promote fair market competiton, and prevent anti competive business practices

What are some main goals of competition policy?

• enhancing consumer welfare

• promoting market efficiency

• controlling market power

• preventing anti competitive practices

• stimulating economic growgj

What is meant by a dominant market position?

Refers to a situation where a company possessed such significant markets power that is can act independently of its competitors, customers, and ultimately consumers

Give examples of firms with dominant market position?

Google, Network Rail

What are anti-competitive practices?

They restrict or distort market competition

Give examples of anti-competitive practices?

• price fixing

• market sharing or allocation

• predatory pricing

• refusal to suppl

• resale price maintenance

What do pro market economists believe?

Argue that unregulated markets naturally allocate resources efficiently through supply and demand

What do interventionalists economists believe?

Believe markets are inherently flawed and require active government involvement to correct market failures and ensure social welfare

What are some pro free market concepts?

• the invisible hand

• price mechanism

• efficiency and innovation

• dangers if intervention

What are some interventionalists concepts?

• market failures

• macroeconomic stability

• equitable distribution

What are 8 ways to correct market failures?

• government provision of public goods and merit goods

• regulation and the correction of market failures

• forcing firms and consumers to generate positive externalities

• taxation and the correction of market failures

• price ceilings (maximum price laws)

• price floors (minimum legal prices)

• government intervention, negative externalities and demerit goods

• pollution permits

What is the calculation for price change?

CPI - X + K

What else is a minimum price called?

Price floor

What is a minimum price in a market?

A government imposed rule that sets the lowest legal price a good, service or labor can be sold for

Who does a minimum price benefit?

Designed to benefit sellers, such as earning a minimum wage or farmers

How do we analyze the impact of a minimum price using supply and demand analysis?

Analyzing the impact involves comparing the legally mandated minimum to the free market equilibrium

When the price is set above the equilibrium, what does this do to supply and demand?

When set above the equilibrium, it forces a higher price, which artificially increases supply while decreasing demand, resulting in an excess market surplus

Examples of price floors

• minimum wage

• agricultural price supports

To have any effect on the market, where must the minimum price be set?

Set above the equilibrium price

When a price is set above the market equilibrium, what happens?

This prevents the price from falling to the market clearing level

When the market price is set below the market equilibrium, what happens?

The market price will naturally rise without being restricted by the minimum price, meaning it will have no effect

What does the elasticity of demand for labor mean?

Measures how sensitive a firms hiring is to wage changes

What does the elasticity of labor supply mean?

Measures how willing workers are to supply their time in response to wage changes

What are 3 disadvantages of price floors? (Minimum prices)

1. Surplus creation (excess supply)

2. Inefficient allocation of resources

3. Higher costs for consumers and inequality

What are 3 other disadvantages of minimum prices?

1. If demand has a high PED - could lead to significant drop in quantity demanded

2. Impact on high consumption groups (lower incomes spend more - regressive)

3. Doesn’t generate tax revenue for the government

What alternatives might be more effective in reducing alcohol consumption?

• high volumetric alcohol taxation (where taxes strictly correlate with alcohol by volume)

• restricting physical availability

• raising minimum drinking age to 21

• better awareness

• aggressive marketing bans

• subsidizing non-alcoholic alternatives

When the government sets a floor price, how does this benefit farmers?

Helps them cover production costs, repay loans and maintain livelihoods

What is a maximum price in a market? (Price ceiling)

A legal limit set by a government or authority on the highest price that can be charged for a good or service

What is the goal of a price ceiling?

To keep essential items or services affordable for consumers

Give 2 examples of price ceilings?

1. Rent controls

2. Utility price caps

What are the cases for rent caps?

• affordability and stability

• reduction in welfare spending

• tax reform migration

What are the cases against rent caps?

• reduced supply

• deterioration in housing quality

• market distortions

What is the act that support people who rent?

The Renters Right Act

Where must be maximum price be set to have any effect on the market?

Below the natural market equilibrium price

If a price ceiling is set above the equilibrium, what happens?

The market price will simply settle at its natural level

If a price ceiling is set below the equilibrium, what happens?

This prevents the piece from rising to clear the market directly resulting in a shortage where quantity demanded exceeds quantity supplied

Describe the situation in the market if rents are capped at a low level

Capping rents at an articulacy low level creates excess demand and reduces the overall supply of rental housing

What might happen if there is a shortage of rented properties at this cap?

Causes intense completion and drives up rents to pay a larger share of their income towards rent (link to higher risk of homeliness and struggling costs)

Evaluating rent controls

Give 2 problems associated with rent controls

1. Unintended consequences

2. Deterioration in the quality of rental housing

Give 2 alternatives policies to improve housing affordability

1. Subsidies for self build, modular housing

2. Incentives for developers to build affordable housing

What is an energy price cap?

A limit on the amount that energy suppliers can charge their customers for gas and electricity

Give 2 problems with the energy cap

1. Smaller entrants into the market collapsed

2. Leads to a sharp rise in fuel poverty

Give 2 policies to address fuel poverty in the UK

1. Subsides for renewable energy suppliers

2. Government funding for home insulation and replacement of inefficient boilers

Give 8 examples of government subsidies?

1. Biofuel subsidies for farmers

2. Solar panels “feed in tariffs”

3. Apprenticeship schemes

4. Furlough scheme during COVID

5. Subsidies for wind farm investment

6. Good/fuel subsidies for consumers

7. Subsidizing childcare for working families

8. Subsidies to the rail industry

Define government subsidy

A form of financial assistance paid by a public authority to an individual, businesses or industry

Give some examples for subsidies to producers and consumers

How is the effect of a subsidy affected by the price elasticity of demand?

When a subsidy is implemented, it shifts the supply curve outwards, but the resulting changes in market price, consumption levels, and benefit distribution depends on how consumers react to price changes

When are subsidies (as a government intervention) justified?

In order to correct market failure (by lowering the production costs, they encourage the output of socially beneficial goods that the free market might otherwise underproduce)

What are 7 justifications for subsidies?

What are some potential disadvantages of government subsidies?

They can cause significant market distortion, create dependency and burden taxpayers

• market distortions/inefficiency (price misalignment and reduced competivness)

• fiscal and economic burden (high financial costs/opportunity costs)

• international trade/environmental impact

Give some reasons why the UK steel industry should be subsidized?

• national security

• green transaction/jobs

• global overcapacity and trade

Give some reasons why the UK steel industry should not be subsidized?

• fiscal burden

• cost to downstream manufacturers

• market inefficiency and energy costs

Give me 2 arguments for and 2 agreements against subsidies for steel

What does PPPs refer to?

A term used to describe a range of partnerships between the public sector and private sector in order to deliver services (Public Private Partnerships and the Private Finance initiative)

Advantages of PFI

Evaluation of PFI projects

What is an internal market?

Where the public sector providers compete against themselves for contracts/jobs

Downsides of internal markets

If administration costs are high, this can cancel out the gain from increasing efficiency

Identify reasons why government intervention may be ineffective

Information gaps and asymmetries, unintended consequences, distortion of price signals, excessive administrative costs, political motives, lack of market disciplines

When evaluating government intervention in markets, what can you say?