3.6.1 Government Intervention

• competition policy

  promote competition, make markets work better, contribute towards improved efficiency in individual markets

  aims to ensure:

  • technological innovation -> dynamic efficiency
  • effective price competition between suppliers
  • safeguard + promote interests of consumers -> increase choice + decrease prices

  main pillars:

  • anti-trust + cartels
  • market liberalisation
  • merger control
• government intervention to control monopolies

  • price capping
  • forced dee-mergers/divestment in an industry
  • opening up of a market to new competition (liberalisation)
  • better information on products for consumers
  • industry adjudicator to help protect consumers against poor service
  • tough laws + monitoring of price fixing/collusion
  • tax of monopoly profits
  • nationalisation
• industry regulators

  rule enforcers

  surrogate for competition if no genuine competition exists e.g. natural monopoly

  appointed by government - oversee how a market works + outcomes in efficiency and welfare for producers and consumers
• price regulation in markets

  maximum price -> normative judgement about what price should be - curb monopoly profits and improve consumer welfare

  to be effective, capped price must be set below normal profit maximising price -> reduce monopoly profit -> may stimulate attempts to improve cost efficiency -> in theory: leads to improvement in allocative efficiency + consumer welfare - in reality: may lead to exit of some businesses from industry which might reduce competition
• arguments for price capping with a monopoly

  appropriate way to curtail monopoly power + prevent them making excess profit at expense of customers

  cuts in real Pl good for household + industrial consumers (increase consumer surplus + raise real living standards in LR)

  stimulate improvements in productive efficiency as low costs needed to raise producer profit

  tool for controlling consumer price inflation
• arguments against price capping

  large number of job losses

  setting different price caps in each industry distorts working of price mechanism

  may not have accurate information when setting price caps for future years

  low profits -> reduce capital investment by utility businesses - consumer suffers if there's under-investment in utility infrastructure such as water and energy
• de-regulation

  liberalise market to encourage new entrants

  reduce statutory barriers to entry
• advantages of de-regulation

  • lower barriers to entry -> increase market supply -> reduce prices for consumers
  • raise competition + contestability -> increase productive, allocative + dynamic efficiency
  • limits firms' ability to restrict output + raise prices
  • firms have lower pricing power -> seek profit through low costs, raise productive efficiency + reduce x-inefficiency
  • raise capital investment + productivity -> increase dynamic efficiency
• examples of de-regulation of markets

  energy market deregulation - increase competition, increase competitive pricing + improve services

  transportation deregulation - increase competition, improve services

  telecommunications deregulation - opened market to competition, entry of new players, improve technology that were initially monopolies

  financial services deregulation - increase competition + innovation, globalisation
• deregulation of parcel services

  UK postal service market deregulated 2006 with Royal Mail losing its monopoly on delivery of larger letters + parcels

  market opened to competition from others -> DHL, DPD, TNT, Hermes (EVRI)

  liberalisation led to increase in number of parcel delivery companies + options for consumers

  growth of e-commerce + online retail, can compete to provide delivery services to online retailers
• rise of digital challenger banks in UK

  • Monzo - launched 2015, offers current accounts, credit cards + personal loans
  • Revolut - launched 2015, offers current accounts, credit cards + personal loans, also offers foreign exchange services + allows customers to hold + transfer money in multiple currencies
  • Starling bank - launched 2014
  • Atom Bank - launched 2014, offers mortgages, savings accounts + business banking services
• advantages of deregulation

  • increased competition -> lower prices, better services, more allocatively efficient (decrease in producer + consumer welfare loss)
  • more innovation -> increase dynamic efficiency
  • more economic growth -> increases LRAS
  • more consumer choice
  • higher contestability -> increase economic welfare
  • lower barriers to entry
  • lower production costs
• disadvantages of deregulation

  • lower safety + quality -> companies prioritising profit
  • less consumer protection
  • increased inequality -> large companies dominate market, small businesses find it harder to compete
  • environmental costs -> negative externalities
• competitive tendering

  when project is put out to tender, private sector firms can bid for right to provide service

  more common in 1980s - Thatcher wanted to introduce elements of free market to local council bodies

  also used in deciding who runs rail franchise

  also known as contracting out

  private companies right to run services for fixed number of years
• downside of contracting out

  • quality of service -> prioritise profit over service quality -> lower standards
  • loss of accountability -> less transparent than gov agencies, challenging for public to hold them accountable for their actions
  • job insecurity -> for public sector employees, transition from public to private -> job lasses/change in employment conditions, increased concerns of well-being of employees
  • lack of public control -> decision-making process less democratic + more influenced by profit motive than public needs
• privatisation

  transfer of ownership of a state-owned enterprise to private sector

  can be done through an initial public offering (IPO) -> involves selling shares to the stock market

  sometimes the government might retain a minority stake in the business -> part-privatisation
• examples of privatisation

  • sale of British Telecom 1984
  • sale of British Gas 1986
  • sale of British Airways 1987
  • privatisation of Royal Mail 2016
  • sale of the National Air Traffic Services (NATS) 2012
  • sale of 45% stake by government in National Grid 2022
• for privatising state-owned businesses

  • economic efficiency -> increase productive + dynamic efficiency
  • access to capital -> increase investment in infrastructure + technology upgrades
  • raising revenue -> improve gov fiscal position + reduce national debt
  • reduction of gov subsidies -> less financial burden on tax payers by shifting costs to private sector
• against privatisation

  • profit motive -> increase prices -> focus on profit at expense of quality
  • accountability -> prioritise shareholder interest over public good
  • monopoly control -> concentration of market power -> reduce competition + consumer choice -> less allocatively efficient
  • natural monopoly -> utilities often involve natural monopolies, not cost effective to have multiple competing providers, limit effectiveness of competition following transfer of ownership
• does privatisation improve economic efficiency

  • competition -> encourages firms to operate efficiently to reman competitive
  • incentives for innovation -> profit motive can drive private businesses to find cost-effective solutions to increase dynamic + productive efficiency
  • reduce bureaucracy -> gov.owned entities burdened by bureaucratic processes + political consideration, hinder efficient decision making, help reduce x-inefficiencies associated with low productivity growth + managerial slack
  • improved service quality -> private firms prioritise service quality to attract + retain customers
• measures to control monopsony power

  fines for firms exploiting monopsony power

  controlling prices paid to suppliers - minimum prices

  subsidising suppliers who are affected by monopsony power

  legislate against late payments

  prevent further monopsony power by blocking mergers or forcing firms to divest outlets or divisions of their business

  measures designed to encourage new entrants into the industry
• state-owned industry

  owned + operated by government of a country

  often established to provide goods/services that are of strategic importance or that are in the pubic interest e.g.

  • National Air Traffic Service - partnership between gov. + private sector consortium, funded by charges made to airlines operating in UK airspace
  • Royal Mint - produces UK coins + coins for other countries, operates on commercial basis + is self-financing, gov-owned
  • Channel 4 - publicly-owned, not-for-profit broadcaster, funded by advertising + sponsorship revenues, operates under Royal Charter
• in favour of nationalisation

  • public interest -> ensure essential services + industries operated in public interest rather than private profit; healthcare, education + utilities considered vital for well-being of society
  • social equality -> benefits generated more evenly distributed among population, include control of prices to achieve greater allocative efficienty
  • service quality -> better quality services than maximising profits
  • job security -> private companies prioritise profit over job security -> potential layoffs + wage cuts
• against nationalisation

  • inefficiency + bureaucracy -> state-owned enterprises may lack incentives for innovation + cost-effectiveness present in competitive private markets
  • lack of innovation + responsiveness to changing market conditions, private companies driven by competition + profit motives, more dynamic + innovative
  • risk diversion -> lack of direct competition + guarantee of gov. support
  • misallocation of resources -> allocate inefficiently -> overstaffing/underutilisation of assets
• evaluating state vs private sector

  ownership of business probably less significant that extent to which an industry is contestable

  quality of regulation important - regulator can act as a surrogate consumer

  distinguish between network + final mile service