Government’s role in fixing/manipulating and failing markets! What’s the breadth of government intervention and what can the government do to promote and/or curtail ‘animal spirits’
What governments want to do/ need to do Regulate imperfect markets, not take-over, using a suite of tools/instruments to stop bad things from happening: Price controls – intervention in gas and electricity markets Setting of quality standards – placing ‘in law’ minimum thresholds of conduct or product quality Performance targets – for example for railway franchises Controlling of mergers and acquisitions via CMA Or, regulate imperfect markets using a suite of tools/instruments to promote things to happen: Small business support/ nurturing new industries Deregulation of certain markets Competitive tendering Privatisation Why bother? Reduction of imperfection(s) resulting in: More equitable prices in society Reduce excessive profits but continue to nurture innovation Improve contestability Improve efficiency – either productive or allocative in an industry/society Improve quality of products for consumption Improve level of choice in the market / improve standards Risks – asymmetric information favours firms and/or regulatory capture
Nice summary of interventions here Options Price controls set to where P=MC in the market resulting in allocative efficiency. Often used in once-privatised industries like water or the railways or postal services. Governments can set profit controls and regulation as well. Commonly known as ‘rate of return’ it is basically a profit cap on firms. Not common in UK but an option nevertheless. Maintaining quality of services also a regulation placed upon some businesses Performance targets Breaking up of monopolist as in BT Lowering entry barriers, regulation and financial constraints to stimulate competition Windfall taxes Privatisation vs nationalisation Deregulation (withdrawal) Subsidies Self-regulation and codes of practice Controlling/ authorising of mergers and acquisitions Nice summary of interventions here
Promoting small business growth – tax incentives and subsidies, grants, seed-funding Legislate against anti-competitive practices – laws, prosecutions and fines Deregulate and withdraw Lower barriers to entry – guaranteed/backed loans, grants/burseries, free training courses Competitive tendering / contracting out – NHS, Defence capital/equipment Privatisation
So what’s the best outcome for government? Pareto efficiency is the ideal model but unobtainable: P=MC in all markets if market failure is a constant then what’s the answer? Theory of second best applied in the real world Policies that promote marginal net welfare gains in different market structures is probably the answer….not trying to make all markets the same… Government needs to arm itself with wide array of tools to achieve this – some blunt, some subtle, mostly practical solutions Eliminating/ mitigating distortions is the name of the game!
Example of the array of tools used by government – labour markets in the UK What’s it done? ‘hard’ and ‘soft’ policies Minimum wages – NMW & living wage Minimum wages – London living wage and living wage foundation…. Maximum wage setting - public sector Maximum wage setting – private sector? Zero hours contracts – good or bad? Sports Direct vs Uber Public Sector wage setting for and against Reducing labour immobility through education and skills development and alternative pathways not as easy as it seems…. Retirement – I’m tired already….. Migration – from Windrush to EUUK today Legislating against wage inequality Policies to promote reduction in wage inequity……?
Typical exam-style questions for section B of Paper 1 using the information above as a guide Explain why some people believe zero hours contract might be a good thing for the UK economy (5 marks) Assess two factors that might affect help governments reduce imperfections in the economy (8 marks) Assess the likely affects of governments intervening in a market to regulate market imperfections (10marks) Discuss the options open to government in reducing market imperfections (12marks) Discuss the possible policies governments may adopt to reduce imperfections in labour markets and their impacts (15 marks) Section B from Paper 1 Evaluate the likely consequences of continued and aggressive government intervention on imperfect markets or should they not simply adopt a policy of withdrawal and let the market naturally self adjust? (25marks) Section C from Paper 1