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3.6 - Government Intervention - Coggle Diagram
3.6 - Government Intervention
Government intervention
A government can intervene with:
oligopolies
monopolies
monosomies
They can change the behaviour of a firm
Government action
Preventing mergers
.
All mergers that will end up with the company obtaining 25% or more of the market will be reported to the CMA
From here the CMA can either:
accept the merger
reject the merger
condition the merger
They may accept the merger if there is already a bigger firm in the market to help create realistic competition
They may condition a merger with factors such selling of other parts of the company. These conditions can often deter the merger anyway
Most common is rejection
Price regulating
Here the government may add price ceilings and floors
Profit regulation
(windfall tax)
Here all profit over a certain threshold would be taxed at a much higher rate relative to the lower rate of the previous profit
Quality standards
They may impose quality standards monopolies and oligopolies because quality may drop due to lack of competition
Performance targets
A government may set a performance target to a firm to control quality. If a firm fails to meet the target then the firm may be fined.
Nationalisation
Where a government can claim a private firm into the public sector. Here they can control the firm themselves (liek RSB) or contract someone else to do it (like trains)
The best remedy for a broken market is competition (consumer driven markets). Competition solve almost all problem in a market.
The government can promote competition by:
actively supporting smaller business. They could do this by lowering taxes for smaller firms
de-deregulation the market. this reduces or removed entry barriers
Tendering (contracting out). The government can give contracts through the private sector. We have done a lot of this.
Privatisation. The government can sell assets or firms to the stock market which can break firm up and improve competition. This was popular on the 80's and 90's
The impact of government intervention
There are several reasons for government failure (the law of unintended consequences):
asymmetric information
conflicting objectives. Policy A may be detrimental to objective B
Admin failure. These policies can be expensive
The government can sometimes fail to foresee unseen effects that a policy may create.
For example, price regulations in the electricity market helps the consumer by priced out smaller firms therefore reducing competition
The CMA is good at controlling mergers but not so good at spotting and soling price fixing
The CMA also has a limited budget which means it can't prosecute as many firms as it would like to. THis could be solved by giving out higher fines.
The highest fine given by the CMA was only £84m to phisher, compared to in the US where they regularly give out billion dollar fines
Higher fines will not only generate more revenue to prosecute more but should deter some firms from committing offenses.
The CMA as a problem with asymmetric information
They often don't have the information required to prosecute and regulate. Therefore they have to rely on the firm for the information. This information can be distorted or manipulated
CMA
- Competition and marketing authority
Windfall tax
is a reasonably successful policy implemented by the last labour government.
The government argue that the market was uncompetitive therefore there was AP so the taxes needed to be higher.
This extra revenue isn't used to help resolve the distorted market
Government regulations often lack real power because they lack the resources
The government often give too light regulations which can cause some big problems (like grenfell).
Government intervention are often limited. However, most distorted markets correct themselves because of the high AP attracting new firms in.