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3.6.1 Gov intervention, NEGATIVES TO PRICE CONTROL, image, image, image,…

- - - - -RPI - X is the rate of inflation - the expected efficiency gains of the firms which make the pass on the increased efficiency to the consumers.
      - -RPI-X+K this also adds the K for the level of investment and has been used in the water industry for 130 million investment.
      - It gives firms incentive to be as efficient as possible as if they decrease costs more than X they can increase profits
  - - - -Regulators can introduce yardstick competition, such as setting punctuality targets based on other European train services.
      - -Firms will resist targets and they may find ways to meet targets without actually improving.
      - -Other firms may fail to achieve targets and therefore arrive late. Regulators must ensure fines are hard enough that targets are met.
- - - - -The government can contract out to the private sector the provision of goods or services. Private finance initiatives.
      - -Competition can be introduced into the market as the government draws up a specification for the good and then firms are invited to bid for it. The firm offering the lowest price earns the contract.
      - BENEFITS: helps to minimise cost for the government and ensures efficiency.
      - DRAWBACKS: the bidding process is time consuming and expensive. In addition, the private sector may cut quality as they have no regard for social welfare.
- - - - -Encourages competition which reduces x-inefficiencies, ensures low prices and high quality as firms need to be competitive.
      - -Raises revenue for the government and reduces the private sector net cash requirement.
      - -Increases investment as it reduces uncertainty about when a government is going to be reelected.
      - -the railway sector was privatised and has seen a rise in passenger satisfaction.
      - -For natural monopolies it may be fairer for the government to own them as they will not exploit monopoly position.
        
        -Some argued that water and electricity industries impact the performance of other industries and should be coordinated by the government.
        
        -Negative over government budget as they are underpriced and no longer earns the firms profit.
        
        -Could lead to negative externalities as private sector does not have the goal of maximising social welfare.