The Impact of Government Intervention

Aims of Intervention

Governments intervene in markets to control monopoly power, promote competition and protect suppliers/employees.

Key aims include:

• Prices: lower prices for consumers to ensure affordability for all levels of income.
• Quality: improved quality of products through investment and innovation.
• Choice: greater choice of businesses and products for consumers to improve allocative efficiency.
• Profit: controlled profits that enable reinvestment without being at the expense of consumers.
• Efficiency: improved productive and allocative efficiency.

Limitations of Intervention

Government intervention can fail, producing government failure, where the intervention results in larger market failure.

Regulatory Capture

Definition: Regulatory capture occurs when regulated firms gain too much influence over the regulators and shape the rules in their own favour rather than in consumers' interests.

Causes:

• Asymmetric information: often the regulator lacks the expertise or information required to regulate the business and therefore relies on the company they are regulating for information/data. The regulated firm can present this information in a manner which benefits them.
• The "Revolving Door": Individuals in the sector often move between jobs in regulatory positions and for the firms being regulated. Regulators may soften regulation in hopes of securing a job with the business in the future.

Result: Regulation becomes ineffective or too lenient towards incumbent firms.

Asymmetric Information

Problem: Governments and regulators often have less information than the firms they are trying to regulate. This makes it difficult to design intervention that is both effective and well targeted.

Result: Policies may be poorly designed, easy to avoid, too costly, or cause unintended consequences.

Other Limitations

• Administrative costs: the cost of enforcing regulation may exceed the benefits created.
• Unintended consequences: policies may reduce innovation and quality, limit competition, or force firms to increase prices to remain profitable.
• Conflicting objectives: a policy that meets one aim may damage another, such as a price cap reducing future investment and quality.