Government Intervention 3.6

Front 1

Competition and Markets Authority (CMA)

Back 1

Work to promote competition for the benefit of consumers and investigate mergers and breaches

Front 2

Price Regulation

Back 2

Regulators can set price controls to force monopolists to charge a price below profit maximising price, using the RPI-X formula. X represents the expected efficiency gains of the firms and the aim is to ensure firms pass on their efficiency gains to consumers. Arguably, a better system is ‘RPI-X+K’, where K represents the level of investment.

Front 3

Profit Regulation.

Back 3

‘Rate of return’ regulation is used where prices are set to allow coverage of operating costs and to earn a ‘fair’ rate of return on capital invested.

Front 4

Quality Standards

Back 4

Monopolists will only produce high quality goods if this is the best way to maximise profits. The government can introduce quality standards, which will ensure that firms do not exploit their customers by offering poor quality.

Front 5

Promotion of small Business

Back 5

The government can give training and grants to new entrepreneurs and encourage small businesses through tax incentives or subsidies . This will increase competition since there will be more firms within the market, and will offer a chance for more firms to join.

Front 6

Deregulation

Back 6

This is the removal of legal barriers to entry to a previously protected market to allow private enterprises to compete. This will increase efficiency in the market by allowing greater competition as more firms can enter and conduct more activities than they could before.

Front 7

Competitive Tendering

Back 7

The government has to provide certain goods and services because they are merit or public goods but this does not mean that the state has to be the producer of all these goods and services. Goods, such as the sheets in NHS hospitals, are produced by the private sector and then bought by the public sector (PFIs).

Front 8

Private Finance Initiative (PFI)

Back 8

The government can contract out the provision of a good or service to private companies e.g. private firms could be employed to run hospitals.

Front 9

Restrictions on monopsony power

Back 9

Fines can be put in place for those who exploit their power and minimum prices may be introduced to ensure suppliers are paid a fair amount. Self-regulation can also be used, but this is weak.

Front 10

Workers Rights

Back 10

The government protects employees through health and safety laws, employment contracts, redundancy processes, maximum hours at work and the right to be in a trade union. The government can also encourage firms to draw up codes of conduct relating to employment practice.

Front 11

Privatisation

Back 11

Privatisation is the sale of government equity in nationalised industries or other firms to private investors. The aim is to revitalise inefficient industries but can sometimes lead to higher prices and poor services.

Front 12

Nationalisation

Back 12

Nationalisation is when a private sector company or industry is brought under state control, to be owned and managed by the government.

Front 13

Advantages of Privatisation

Back 13

It encourages greater competition, managers become more accountable, it can reduce the public sector net cash requirement, firms can invest with greater certainty instead of worrying about change when a government is elected.

Front 14

Disadvantages of Privatisation

Back 14

Fairer for the government to own the firm since they won’t abuse their monopoly position, there are problems over externalities and inequality.

Front 15

Advantages of Nationalisation

Back 15

It is better for a monopoly to be run by the state as they aim to maximise social welfare, the government will consider externalities, the government will guarantee a minimum level of service.

Front 16

Disadvantages of Nationalisation

Back 16

Nationalised industries suffer from the principal-agent problem and moral hazard, they will experience X-inefficiency and this could cause higher prices for consumers.

Front 17

Impacts of Government Intervention

Back 17

Governments are able to prevent monopolies charging excessive prices and aim to limit their profit, ensure that consumers pay fair prices, they can increase efficiency, they can increase quality.

Front 18

Limits of Government Intervention

Back 18

Regulatory Capture - occurs when the regulator is captured by the firm/industry they are regulating, Asymmetric Information - this is where regulatory bodies have to use information provided to them by the industries when setting price targets.

Front 19

Regulatory Capture

Back 19

An economic theory that regulatory agencies may come to be dominated by the interests they regulate and not by the public interest.