3.6.2 The impact of government intervention

WHAT IS AFFECTED BY GOVERNMENT INTERVENTION

• monopolies

• efficiency

• consumers

IMPACT- ON MONOPOLIES

• govs able to prevent monopolies charging excessive prices and aim to limit their profit

• try to ensure that consumers pay fair prices, receive a good quality service and have a lot of choice through different methods of regulation and target setting

• high regulation may force some firms out of industry, which would reduce choice

IMPACT- ON EFFICIENCY

• can increase efficiency in a market by increasing competition and contestability

• by regulating prices, they ensure a business keeps their costs low and so prevent X-inefficiency

• try to increase dynamic efficiency by encouraging investment

• but if gov regulates too strongly, they can push costs up and led to inefficiency

IMPACT- ON CONSUMERS

• if gov runs a business they should reduce prices and increase quality as they aim to benefit consumers

• a public sector business is likely to be allocative efficient, as they aim to maximise social welfare

• will see lower costs due to economies of scale

• but gov may suffer from X-inefficiency as they have no incentive to be efficient due to the lack of competition- may push up prices and reduce quality of a good

• also gov likely to offer less choice, since there is only one company producing the good

LIMITS TO GOVERNMENT INTERVENTION

• regulatory capture

• asymmetric info

LIMITS TO GOVERNMENT INTERVENTION- REGULATORY CAPTURE

• when regulators start acting in interests of company, due to impartial info, rather than in consumer interests

• large corporations can invest huge amounts in gaining support of their regulator

• also is likely that the regulator will have worked in the sector for many years, as these people will have experience and knowledge of the industry

• so will have personal connections w/ those that theyre regulating and makes it difficult for them to be unbiased

• example of gov failure

LIMITS TO GOVERNMENT INTERVENTION- ASYMMETRIC INFORMATION

• where regulatory bodies have to use info provided to them by the industries when setting price targets

• it is in the industry’s best interest to maximise their profits and so may provide inaccurate or limited info, meaning regulators are unable to set correct targets, prices etc.

• so gov failure may occur if regulation such as price cap or quality standards are not set correctly- could lead to misallocation of resources