The Impact of Government Intervention
The Desired Outcomes Of Government Intervention
| Prices | Profit | Efficiency |
| Affordable & stable prices | Permitting enough to keep firms in the industry (normal profit) but limiting how much they make so that household income is protected | Reducing wastage of valuable resources & one of the best ways to achieve this is by developing rigorous competition |
| Quality | Choice | |
| Ensuring products are fit for purpose & contribute to a better standard of living | 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) |
Limits to Government Intervention
- Government intervention is not always effective. Two of the main reasons for this are the existence of regulatory capture & asymmetric information
Regulatory Capture
- Regulatory capture occurs when firms influence the regulators to change their decisions/policies to align more with the interests of the firm
- 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
- 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
- Naturally, regulatory capture can completely prevent fair outcomes in the markets concerned
Asymmetric Information
- Often governments believe they are making the best decision in order to meet their aims
- Many times it is not the best decision due to the fact that the government or regulators either do not have the full & relevant information - or they do not understand the market they are trying to regulate e.g. many financial markets are fast moving & incredibly complex
- This existence of asymmetric information has been responsible for some spectacular government failures
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