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ECONOMICS THEME 3 - TOPIC 3.6 - Government Intervention - Coggle Diagram
ECONOMICS THEME 3 - TOPIC 3.6 - Government Intervention
3.6.1 Government Intervention
The Competition + Markets Authority work to promote competition and investigate mergers and breaches of UK and EU competition law, enforce consumer protection law
Controlling mergers
A merger is investigated to see if it will result in market share greater than 25% or if it creates a combined turnover of £70m or more
It's to ensure they don't exploit their customers
However, very few mergers are investigated each year
Controlling monopolies
Monopolies are allocative + productively inefficient so are deemed to be anti-competitive
Price regulation
is forcing monopolists to charge a price below profit maximising level using RPI-X formula and it gives firms an incentive to be more efficient to increase profits
Profit regulation
is also used in order to allow fair returns on capital invested based on typical rates
Quality Standards
ensure monopolies don't exploit customers with poor quality products
Performance targets
ensure firms improve their services for customer gains
Promoting competition and contestability
Promotion of small business
where government can give training, grants, subsidies to increase competition and therefore innovation and efficiency
Deregulation
is the removal of legal barriers to entry and governments also privatise industries to allow for competiton
Competitive tendering
is where the private sector produces goods for the public sector to increase efficiency by allowing compeitition which decreases costs (e.g private companies make NHS bed sheets)
Protecting suppliers + employees
Restrictions on monopsony power
to stop them dropping prices
Workers rights
to protect employees
Privatisation and Nationalisation
Privatisation is the sale of government equity in nationalised industries or other firms to private investors to revitalise the inefficient industries but can sometimes lead to higher prices + poor services
Nationalisation is when a private sector company or industry is brought under state control, to be owned and managed by the government
Pros + Cons
Long term investment provided
Natural Monopolies run by state maximise social welfare instead of profits
Government consider externalities
Government guarantee a minimum level of service
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Pros + Cons
Encourages greater competition, which reduces x-inefficiency, ensuring low prices + high qualiy
reduces public sector net cash requirement
reduces government interference so firms can invest with greater certainty
puts utilities in hands of the people so people work harder
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3.6.2 The impact of government intervention
Impacts
Governments are able to prevent monopolies charging excessive prices and aim to limit profits.
Can increase efficiency by increasing competition
Government will reduce prices and increase quality to benefit consumers. Likely to be allocative efficient as it aims to maximise social welfare. However, can be x-inefficient as they have no incentive to be efficient due to a lack of competition
Limits
Regulatory capture
can occur where the regulator meets and sympathises with firms, reducing their ability to regulate fairly
Large corporations can also invest heavily into doing this or finding ways around the regulations
Asymmetric information
Regulatory bodies use information provided by the industry so the industry may provide inaccurate/limited information in order to maximise profits