EDEXCEL A LEVEL ECONOMICS NOTES - 3.6 Government Intervention

3.6.1 Government intervention

a) Government intervention to control mergers

• The competition and Markets Authority (CMA) is the main competition regulator in the UK. They have objectives to ensure that markets remain competitive and efficient as possible. This will ensure that consumers benefit in the form of lower prices and greater choice, hence boosting allocative efficiency. 
• The competition authorities investigate potential mergers between 2 firms, to ensure that this does not cause inefficiencies or lead to large anti-competitive practices. If the merger leads to a monopoly forming, it is likely going to be prevented.

b) Government intervention to control monopolies:

• Governments intervene in the market to control monopolies and prevent the abuse of monopoly power. This is because monopolies can cause market failure and a loss of consumer welfare as they can exploit consumers with high prices and restricted output. 

Ways to intervene: 

1. Price regulation= can prevent monopolies from charging excessive prices to consumers, as this can result in a fall in allocative efficiency. (price caps) 

Cons of this intervention= limit profits, limit choice, invest less – > harm allocative efficiency

1. Profit regulation= governments can control the profits earned by firms to ensure they are not excessive. In the UK, the government can alter the cooperation taxes, which is how much of the profits the government take from firms. Con: Limit dynamic efficiency and hence quality for consumers.
2. Quality standards: Additionally, regulators can observe the quality of goods and services provided by the firm. For example, in the gas and electricity markets, regulators ensure the elderly are treated fairly, especially in the colder months. Governments ensure minimum standards are met.
3. Performance targets: The government sets targets on organizations; such as schools to ensure all standards are met. This aims to regulate their quality. The NHS has targets for waiting times too. 

c) Government intervention to promote competition and contestability:

1. Enhancing competition between firms through the promotion of small business 

• Small and medium-size firms are seen as important for creating a competitive market environment. They create jobs and stimulate investment and innovation. Governments can improve access to finance and hence reduce barriers to entry, which will make it easier for smaller firms to enter the market. The new firms can challenge the existing firms, hence making the markets more competitive and driving out the inefficient small firms.

2. Deregulation and privatisation

• By deregulating or privatising the public sector, firms can compete in a competitive market, which could boost efficiency. 
• Privatisation is when assets are transferred from the government to private firms. This is beneficial because firms are profit maximisers so will be encouraged to be efficient. There is also a lot of competition between firms, so this can incentivise firms to cut prices, innovate and improve quality and choice for consumers.  
• However, since resources are shifted to the private sector, there is no guarantee there will be competitive markets. It can lead to monopolies forming. There are also other factors to consider when analysing the impacts such as: depends on motives of firms, depends on how many firms are competing, depends on how high barriers to entry are, governments providing it may be better because they care about the interests of consumers whereas firms will only want higher profits. 
• Deregulation is the act of reducing how much an industry is regulated. This can mean less barriers for firms to enter and compete, thus reducing the contestability of the market. Lower barriers to entry can alter the behaviour of existing firms as they will be wary of the potential threat of new entrants who can enter and compete for their customers.

3. Competitive tendering for government contracts 

• The government usually provides goods that the private sector are not involved in as it is not profitable form, for example the provision of public goods such as roads, street lights etc. To resolve this, the government creates a contract, where firms can offer a price (payment they want) and quality standard to the government for this contract. The government will pick the firm with the lowest price and best quality standard as the government itself to want to minimise its costs. However, the private firm may not meet the requirements wanted by the government, they will less likely have social welfare as priority.

d) Government intervention to protect suppliers and employees:

1. Restrict monopsony power of firms

• Monopsonies are the sole buyers from suppliers, hence have bargaining power over them. Farmers (supplier in this case) lose out on a lot of money from supermarkets, as the supermarkets pay them low prices due to their monopsony power over these suppliers. Governments can regulate this to ensure suppliers are receiving a fair deal. For example, UK farmers may receive subsidies to support their production and ensure they are earning stable incomes. The CMA (competition and markets authority) may investigate firms to ensure they are not exploiting suppliers and abusing their monopsony power. If this is the case, the CMA can fine these firms.

2. Nationalisation

• This occurs when private sector assets are sold to the public sector. The government gains control over the industry. This can benefit employees and suppliers as the government are not profit maximisers and are less likely to exploit suppliers and consumers. Some nationalized industries bring strong positive externalities. For example, by using public transport, congestion and pollution are reduced. Benefitting society as a whole is a big objective of the government.

3.6.2 The impact of government intervention

a) The impact of government intervention on:

• Prices:
Government intervention (e.g., price controls or taxes) can raise or lower prices depending on the policy. If the policy boosts competition it is likely going to lead to lower prices.

• Profit:
Regulation, taxes, or subsidies can reduce or increase firm profits by changing costs and market conditions.

• Efficiency:
Intervention to boost competition and contestability can lead to increase in consumer choice, quality and lower costs. Thus boosting allocative and dynamic efficiency. However, if regulations are to harsh it can limit profits --> limit dynamic efficiency --> less investment --> lower quality and choice.

• Quality:
Standards and regulations can improve product quality and safety, however if regulations are to strict on profit etc, it can limit dynamic efficiency and hence investments. This can harm quality.

• Choice:
Policies may expand consumer choice through laws to boost competition or limit it if strict controls reduce the number of firms in the market. Also, profit regulations can lead to less investment, limited economies of scale and hence limit the variety of products the firm can offer.

b) Limits to government intervention:

o regulatory capture

Regulators may develop deeper relationships with the firm and share common interests. As a result, they may act in the interests of the firm rather than the public and hence not regulate the firm effectively.

o asymmetric information

Governments often have insufficient information about the firm such as their operations, costs, and market conditions of firms than the firms themselves. This information gap makes it difficult for regulators to have effective policies in place or monitor compliance. Therefore, firms may exploit this by hiding true costs and lobby for favourable rules. As a result, interventions may be inefficient.