3.6.2 - The impact of government intervention

• Governments can prevent monopolies charging consumers excessive prices, which might result in a loss of allocative efficiency.
• Limiting how much a firm can increase its prices by also encourages the firm to become more efficient. This is so that they can lower their costs and increase their profit margins.
• If governments impose strict price caps, investment could be limited, since the amount of profit that a firm makes is restricted.
• If governments regulate monopolies and encourage the start-up and growth of SMEs, consumer choice in the market widens, since there are more firms competing. A stringent price ceiling might force some suppliers out of the markets, which reduces the quantity supplied and narrows choice for consumers.
• Governments can ensure firms are meeting minimum targets, which ensures firms focus on increasing social welfare. For example, firms in the gas and electricity markets are regulated to ensure vulnerable groups, such as the elderly, are kept warm during colder months.
• Limits to government intervention:

  • Regulatory capture
  • Asymmetric information
• There is the risk of regulatory capture. This is when regulators start acting in the interests of the company, due to impartial information, rather than in consumer interests. This information disadvantage is a problem for regulators.
• The problem of asymmetric information can make it hard to determine what level a price cap should be imposed at. It is hard to determine government policies when intervening where there is market failure, since the extent to which the market fails involves a value judgement
• When a big state-run monopoly, let BT or British cash grows inefficient. The government will privatise the company.
• Privatisation is when the government transfers ownership of a public sector firm to the private sector like when BT British gas in British Airways were sold to private shareholders.
• Nationalisation is when the private sector transfers ownership of a private sector firm to the government.
• Private sector is too profit driven Therefore, by nationalising a firm would make a loss which will be covered by the government to decrease prices for consumers.
• An example of nationalisation is in 1948 when The Labour Party nationalised the British railway system.
• Nationalisation gives the government whole control over the firm and the market and setting prices where AR equals MC
• During nationalisation where AR equals MC, Allocative efficiency, the firm is making a huge loss. This is covered by government taxes.
• However, in 1993, the conservative party accused British railways for being ex inefficient as they were wasting taxpayers money. This letter the firm becoming back into a private sector.