3.6.2 Impact of Government Intervention

• desired outcomes of government intervention

  • prices -> affordable and stable prices
  • profit -> permitting enough to keep firms in the industry (normal profit) but limiting how much they make so that household income is protected
  • efficiency -> decrease wastage of valuable resources, one of the best ways to achieve this is by developing rigorous competition
  • quality -> ensuring products are fit for purpose + contribute to a better standard of living
  • choice -> wider choice improves standard of living, improves product quality, generates more economic activity in an economy + increase GDP
• limits to government intervention

  not always effective

  two of the main reasons for this are the existence of regulatory capture and asymmetric information
• regulatory capture

  when firms influence the regulators to change their decisions/policies to align more with the interests of the firm

  firms spend millions lobbying regulators directly or in many cases lobbying politicians who can issue instructions to the regultors

  some lobbying activity is corrupt + there is a fine line between influencing activity + bribing - UK gov. has an agenda to improve the transparency of any lobbying activity can prevent fair outcomes in the markets concerned
• asymmetric information

  often gov. believe they are making the best decision in order to meet their aims

  many times it's not the best decision as gov/regulators either do not have the full + relevant info. or do not understood the market they are trying to regulate e.g. many financial markets are fast moving + incredibly complex

  the existence of asymmetric info. has been responsible for some spectacular gov. failures