Impact of Gov. Intervention

• What does government intervention impact on?

  • Prices
  • Profit
  • Efficiency
  • Quality
  • Choice
• How do govs impact prices?

  Prices become more affordable and stable
• Example of how gov impact price:

  They can prevent monopolies charging consumers excessive prices, which might result in a loss of allocative efficiency.

  This can make services from utility companies, such as water, gas and electricity more affordable, which is especially beneficial to low and fixed income households.
• Example of how gov impact price (2) :

  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 corporation tax is high, firms might pass the extra cost onto consumers, resulting in higher prices, rather than losing their own profits.
• How do gov impact profit:

  Permitting enough to keep firms in the industry (normal profit) but limiting how much they make so that household income is protected
• Example of how gov impact profit:

  If governments impose strict price caps, investment could be limited, since the amount of profit that a firm makes is restricted.

  However, the recent fall in UK corporation tax from 19% to 25% will make firms lose more profits. The size of the increase can be evaluated- is 6% a significant rise?
• How do govs impact efficiency?

  Reducing wastage of valuable resources & one of the best ways to achieve this is by developing rigorous competition
• Diagram to show how govs effect efficiency:

  The diagram shows where public sector and private sector firms operate.

  Private sector firms are more likely to operate at Q1 P1, which is the profit maximising level of output and price.

  A public sector firm is more likely to operate at Q2 P2, which is the allocatively efficient level of output (AR=MC).

  Therefore, government intervention might lead to an increase in economic efficiency, since the objectives change from profit maximisation to maximising social efficiency.

  A) MC

  B) AC

  C) AR

  D) MR

  
• What do free markets economists argue against gov interventionist with efficiency?

  That by operating in a competitive environment, firms have an incentive to become efficient. This is because they are forced to lower their average costs in order to profit maximise. This makes private sector firms more productively efficient.

  They might also argue that private sector firms have to produce the goods and services that consumers want in order to keep earning profits. This might increase allocative efficiency.
• How do govs impact quality?

  Ensuring products are fit for purpose & contribute to a better standard of living
• Example of how govs impact quality:

  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.
• Why might firms compromise on quality?

  To save on costs because of the objective to profit maximise
• What might happen to quality if private sector firms have more expertise and knowledge which gov don't have?

  they might be able to produce goods and services of a higher quality, than if nationalised for example.
• How do govs impact choice?

  Wider choice improves the standard of living & also helps to improve product quality. More choice also generates more economic activity in an economy & increases the gross domestic product (GDP)
• Example of how govs can impact choice:

  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.

  If governments can reduce the price of a good or service, it could allow those on low and fixed incomes to access goods and services they previously could not afford