Limitations of gov. Intervention

• Why might there be some limitations to gov intervention?

  Its not always effective. There are 2 main reasons for this:

  • Regulatory Capture
  • Asymmetric Information
• What is regulatory capture?

  occurs when firms influence the regulators to change their decisions/policies to align more with the interests of the firm
• Why is regulatory capture important?

  Firms spend millions lobbying regulators directly - or in many cases lobbying politicians who can issue instructions to the regulators e.g in 2021 the former UK Prime Minister, David Cameron, was caught in an embarrassing case of lobbying for a failed financial venture by a firm called Greensill Capital
• What does lobbying mean?

  The process of engaging with decision makers in gov to attempt to influence the decisions they make which impact the operating environment of the firm doing the lobbying. Often specialist firms (who are well connected in government) represents the interests of private firms
• Why is lobbying activity bad?

  Some lobbying activity is corrupt & there is a fine line between influencing activity & bribing. The UK Government has an agenda to improve the transparency of any lobbying activity
• What is asymmetric information?

  When one party in a transaction has more information than the other party and this results in inefficient market outcomes
• What is the problem with asymmetric information?

  It can make it hard to determine what level a price cap should be imposed at
• Why does asymmetric information become an issue for the government?

  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.

  For example, it is hard to decide what the cost of pollution to society is. Different individuals will put a different value on it, depending on their own experiences with pollution, such as how polluted their home town is.
• What happens if the government doesn't have sufficient information?

  governments could make poor decisions and it could lead to a waste of scarce resources.