Knowt
3.6.1 Government Intervention
Govt. intervene in two ways to promote competition in a market:
Competition policy - Laws to ensure competition in a market
Regulation - Direct controls on firms to aim to solve market failure - ‘policing’
‘Assess ways in which govt. intervention can promote competition in a market’
Define - Market competition = Price and non price competition between firms in a market with relatively low barriers to entry - compete on market share, revenue ect.
Competitive markets:
Relatively low concentration rations
relatively low barriers to entry/exit
No dominant monopoly in a market
Pretty contestable
Prices set at competitive levels - absence of collusion
Government can intervene:
Direct - Policy, regulation
Indirect - Info to influence consumers
Liberalisation of a market:
Lowering entry barriers for new firms
Breaking up dominant/ legal monopolies
Privitisation of industry / competitive tendering ( PFI = Newman college )
Regulation on monopolies and oligopolies:
Tough responses to anti-competitive behaviour i.e. collusion/cartel activity by imposing harsh fines if not imprisonment
Block monopolistic mergers and takeovers
Price capping to control excess SNP - price caps ( max prices )
Improving the flow of info to consumers
Subsidies and taxation:
Subsidies for new coming businesses to lower their start up costs which will encourage new entrants ( i.e. renewable energy )
Taxation relief/patents to encourage creative destruction in markets
Limits of intervention
Liberalisation/dereg:
Some industries are naturally more competitive than others with higher barriers to entry/ exit
Natural monopoly argument -intervention may cause more harm than good
Privatisation itself does little to promote competition - it would requite other competition policies
What matters is the contestability of the market nit ownership
Price caps ( i.e. max prices ) may simply just make it more expensive for new entrants to enter a market - this will simply deter them
State aid ( subsidies ) may just keep inefficient firms in the market
May simply be better off letting market forces doing their jobs - most monopolies don’t last long due to X inefficiencies - best off letting them go bankrupt rather than intervening which is also costly
Monopoly regulation
Price regulation
RPI- X = RPI being the rate of inflation and X being the percentage or amount the monopoly should’ve gained in efficiency
Aim: To promote efficiency in monopolies which will in turn hopefully keep prices down for consumers
If monopolies are efficient and keep costs low then they can increase prices for less than RPI and still make sufficient if not more profit margins
RPI ± K = RPI being the rate of inflation and K being the added amount to allow for capital investment
K must be greater than RPI or below if they believe that prices can increase less than inflation rate
Advantages:
The regulator can set price caps depending on the state of climate/ industry
Incentive if a firm can cut costs by more than X this will increase their profit margins
Surrogate competition - prevents abuse of monopoly power
Great community effects - if capital investment involved per say infrastructure
May improve the quality of products
Evlt :
Information failure - how can the govt. know the sufficient levels of X or K ??
Costly and very difficult to set - opportunity cost of tax payers money
If too struct this can stifle investment /promote offshoring
If a firm becomes more efficient than X then they are penalised for being too efficient
If K is too low then firms may not have enough to invest
May have negative effects on quality
Regulatory capture - contacts of regulators - go soft
Quality control/standards
Trains on time/ delays they’re allowed to have per day
Gas and electricity - can’t cut for OAP
NHS - GP per patient per hour
Emergency services for 8 mins or less
Evlt :
Unintended consequences - quality of product/ service in an attempt to meet regulations
Loop holes - i.e. trains making longer journeys
Profit control
This is where the govt. look at profit made by a firm and set a reasonable profit level that they ‘should’ be making
What they deem as excessive profitability
I.e. wind fall tax
Evlt:
Incentive to increase costs
To over employ capital
Assymetric info
Less innovation / dynamic efficiency
PFI
This changes the model of funding on large scale investments for private firms to build infrastructure/ schools - repaid gradually over 25 years by the govt.
Advantages:
Introduce competition into a market
Efficiency - private sector is usually more efficient due to price comp
Positive externalities - may be cheaper in LR
Disadvantages:
Profit organisations - incentives to keep costs low which may in turn have an effect on quality - i.e Newman
Risk lies with govt. and tax payers money - opportunity costs
Adds to public sector debt
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