Government intervention

Governments intervene in the working of business to maintain what where

competition in markets

What are the two major methods of government intervention

- competition policy

- regulation

Intervention to Control Mergers via the CMA Explanation

- seeks to alleviate market failure in order to protect the interests of the consumers

- done by curtailing monopoly power and restricting mergers which would exceed a 25% market share

Example of blocking a merger

Sainsbury's and Asda

Pros of Intervention to Control Mergers (4)

- protect consumers from powers of monopolies

- protect suppliers from monopsonies

- protect rival firms from the power of the larger firm

- maintain competition and contestability

Evals of Intervention to Control Mergers (3)

- potential benefits to consumers of the possible dynamic efficiency, synergy or cross-subsidization possible with a large firm with price setting power

- government failure possible through asymmetric information or regulatory capture

- advantages of monopoly

Advantages of a monopoly (5)

- Supernormal profits may be ring-fenced and spent on investment and R&D - which may help the firm achieve dynamic efficiency in the long run and so produce higher quality goods and services at lower prices for consumers.

- Monopoly may be more likely to innovate due to high barriers to entry.

- Monopolies may have large economies of scale, allowing them to produce goods and services at lower prices.

- Monopolies may be internationally competitive due to large economies of scale and therefore generate export revenue and thus help improve a nation's position on its balance of payments.

- High revenue/profit may be a source of government tax revenue.

Controlling monopolies through Price Regulation (RPI-X) explanation

- restrict output and charge higher prices

- intervene to mimic effects of competition and act as a surrogate for competition

- done by taking the RPI and substituting a factor x determined by the regulator

- price capping

Pros of Controlling monopolies through RPI-X (4)

- creates incentives for businesses to reduce their unit costs by being more productively efficient and innovative

- improve consumer welfare by keeping prices lower

- price controls can keep inflation down

- supply side policy

Eval of controlling monopolies through RPI-X

- regulatory capture

Eval of controlling monopolies through RPI+K

Regulatory capture

Regulatory Capture

regulatory agency that is created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate an industry or sector the agency is charged with regulating.

Controlling Monopolies through RPI+K Explanation

- takes RPI and allows addition of K factor, which accounts for additional capital spending that a firm has agreed

Pros of Controlling monopolies through RPI+K

- funneled to benefit consumers through reinvestment into innovation

Controlling monopolies through profit regulation explanation

- allows firms to make a certain level of profit-based on its capital stock

Pros of controlling monopolies through profit regulation

- any excess profit spent on additional capital and increase efficiency

- surrogate for competition

Cons of Controlling Monopolies through profit regulation

- no incentive to make efficiency gains and increase profits

- firms aren't rewarded for their success, in fact they are penalised for it

Pros of controlling monopolies through quality standards and performance targets

- incentivise to increase efficiency

- surrogate for competition

- easy to gather data

Eval of controlling monopolies through quality standards and performance targets

- need to be set and monitored and that is expensive

- unintended consequences

Promoting competition and contestability through promotion of small businesses - methods (4)

- tax breaks at startups

- subsidise start-ups

- reduce regulation

- help with loans

Promoting small business pros (2)

- lower barriers to entry

- less likely for incumbent firm to abuse power

Evals of promoting small businesses (2)

- opportunity cost

- zombie firms, keeping deadweight alive

Promoting competition through deregulation Pros (3)

- allowing more firms to enter and create a competitive market leads to economic efficiency

- productive efficiency is created as firms strive to reduce costs in order to complete efficiency

- allocative efficiency is created as firms strive to meet consumer demand by lower price

Promoting competition through deregulation Cons (4)

- lowering of standards with safety, quality and workers rights

- might not be enough to encourage firms if other barriers exist

- could also help incumbent firm

- can lead to lower SNP

Competitive tendering

introducing competition among private sector firms which put in bids for work contracted out by public sector firms

Pros of Competitive tendering (2)

- helps reduce government expenditure and creates a competitive market within the public sector

- productive efficiency created at lower cost, whilst meeting a minimum standard

Cons of competitive tendering (2)

- bidding process needs to be discrete and tends to leads to promises being made about quality and cost that often cannot be achieved in reality

- possible government failure in awarding the contracts

Pros of privatisation to create competition and contestability (3)

- lower prices for consumers

- increase in quality

- allocatively efficient

Restrictions on Monopsony power Pros (1)

- regulation through code of conduct promotes competition

Eval on restricting monopsony power (2)

- self-regulation may be abused

- regulatory capture

Nationalisation Pros (6)

- increased government revenue

- state not motivated by profit

- increase productive efficiency

- strategic control

- long term strategy

- economic welfare

Nationalisation Cons (2)

- decrease, since there is no profit incentive

- lost competition could lose efficiency