Impact of Government Intervention
Economics: Edexcel A A Level, topic 6.3.9
The Impact of Government Intervention
Government intervention can have a range of impacts on prices, profits, efficiency, quality, choice, consumer surplus and producer surplus.
Minimum wage
- Imposing a minimum wage or minimum price in a monopsony market can increase the welfare of workers.
- The government would need sufficient information to implement this. However, it seems reasonable to assume that a government would know about wages in the sector.
- However, implementing a minimum wage outside of a monopsony may increase unemployment.
- Increasing the wage in a single market may also distort other labour markets. If the minimum wage in farming rose very high, there may be labour shortages in retail stores like Zara.
- A minimum wage will likely reduce profits in that industry.
Nationalisation
- Nationalisation may be a solution to a natural monopoly or market with a monopsony employer.
- However, the lack of a profit incentive may encourage inefficiency. If a business is inefficient, then it has a higher cost base and prices for consumers may be higher.
- However, nationalisation or state provision may lead to an equal or equitable distribution of consumption.
- If there is one provider, there may be less choice and a lower incentive to produce quality.
Privatisation
- In the 1980s, the UK government privatised companies like BT and British Airways.
- The theory was that the profit incentive would increase innovation, quality and that competition improved consumer choice.
- However, some people argue that the UK's Telecoms infrastructure - BT Openreach - has been underinvested in over the years. The UK's telecoms infrastructure is a natural monopoly.
Increasing penalties against collusion
- Increasing fines for colluding or encouraging whistleblowing should reduce prices and increase choice.
- This should increase quality and choice, whilst also encouraging efficiency.
- However, dynamic efficiency may fall if supernormal profits aren't made.
- This should decrease profits to below the monopoly level (at MC=MR).
Subsidies
- Subsidies may encourage the consumption of merit goods.
- However, subsidies could reduce the incentive to be efficient.
- Choice should rise because of the increased incentive to enter the industry.
- Consumer surplus and producer surplus should rise.
- Subsidies should increase industry profits.
Problems with Government Intervention
Limits of government intervention include regulatory capture and asymmetric information.
Regulatory capture
- Sometimes, firms may influence the regulating body so that they favour the firm in any decisions they make.
- When this happens, the regulator may prioritise the interest of the firm, rather than the consumer.
- This is an unintended consequence of government intervention and so is a form of government failure.
- E.g The Office of Communications (OFCOM) being persuaded by firms in the telecommunications industry.
Revolving doors
- This term was made popular by Joseph Stiglitz.
- Lots of investment bankers go on to work in government or in regulators.
- US Treasury Secretary, Steven Mnuchin, used to work at Goldman Sachs.
- Robert Rubin, who led Bill Clinton's National Economic Council also worked at Goldman Sachs.
Inadequate or imperfect information
- In a world of perfect information, governments should be able to make the right decisions to improve allocation.
- Asymmetric information limits the governments ability to critically assess market failures and possible solutions.
- So the right decision isn't always made and government failure can arise.
Test yourself on Impact of Government Intervention
How will a minimum wage or minimum price in a monopsony market impact the welfare of workers?
What is the term to describe when workers in an industry start working for the regulator and design policy around their own or their old firm's interest?