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20a Government intervention and government failure - answers

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20 Government intervention and government failure

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Tutor2u Links

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A collection of study resources on competition policy - Any policy which seeks to promote competition & efficiency in markets and industries.

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Competition and Markets Authority (CMA) | tutor2u Economics

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The CMA is the UK's primary competition and consumer authority. It is an independent department with responsibility for carrying out investigations into mergers, markets and the regulated industries and enforcing competition and consumer law. From 1 April 2014 it took over the functions of the Competition Commission

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Product markets refer to markets in which all kinds of goods and services are made and traded, for example the market for airline travel; smart-phones, new cars; pharmaceutical products and the markets for financial services such as banking, mortgages and pensions.

Supply-side policies in product markets are designed to increase competition and efficiency
Privatisation

Over the last 30 years, many former state-owned businesses have been privatised - i.e. transferred from the public to private sector.

Examples in Britain include British Gas, British Telecom, British Airways, British Steel, British Aerospace, the regional water companies, electricity generators and distributors, and the railways.

The Royal Mail was part privatised in 2013.

Privatization is designed to break-up state monopolies and create more competition. The government also created utility regulators such as OFCOM and OFWAT who have in the past imposed price controls and who are now in charge of over-seeing moves towards competitive markets in areas such as gas and electricity supply and telecommunications.

Deregulation of Markets

De-regulation or liberalisation means the opening up of markets to greater competition

The aim of this is to increase market supply (driving prices down) and widen the choice available to consumers

Good examples of deregulation to use include: urban bus transport, post and parcel delivery service, telecommunications, and gas and electricity supply.

Toughening up of Competition Policy

Most supply-side economists believe that competition forces business to become more efficient in the way in which they use scarce resources.

A tougher competition policy regime includes policies designed to curb anti-competitive practices such as price-fixing cartels and other abuses of a dominant market position - in other words - intervention to curb some of the market failure that can come from monopoly power

A commitment to free (open) trade

Trade between nations creates competition and should be a catalyst for improvements in costs and lower prices for consumers

The UK is committed to an expansion of free trade within the European Union Single Market and also negotiating a liberalisation of trade in the global economy as part of its membership of the World Trade Organisation.

Measures to encourage small business start-ups / entrepreneurship

The small businesses of today often become the larger businesses of tomorrow employing more workers and contributing to innovation that can have positive spill-over effects in other industries.

Governments of all political persuasions argue that they want to promote an entrepreneurial culture and to increase the rate of new business start-ups.

Supply side policies include loan guarantees for new businesses; regional policy assistance for entrepreneurs in depressed areas of the country; advice for new firms

IMF calls for higher investment in the UK economy to drive growth

In its annual assessment of the U.K. economy, the IMF called on the UK to invest in skills and infrastructure and increase banking sector competition in order to foster growth and achieve a sustainable recovery.
Adapted from news reports, July 2013

Capital investment and innovation:

Capital spending by firms adds to aggregate demand (C+I+G+(X-M)) but also has an important effect on long run aggregate supply.

Tax relief on research and development and reductions in the rate of corporation tax

A key policy for the Coalition has been the creation of 24 new Enterprise Zones that offer lower taxes and easier planning laws for businesses in designated areas supported by a Regional Growth Fund

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Supply-Side Economics - Product Market Reforms | tutor2u Economics

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Product markets refer to markets in which all kinds of goods and services are made and traded, for example the market for airline travel; smart-phones, new cars; pharmaceutical products and the markets for financial services such as banking, mortgages and pensions.

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The aim of competition policy is promote competition; make markets work better and contribute towards improved efficiency in individual markets and enhanced competitiveness of UK businesses within the European Union single market.

Competition policy aims to ensure
o Wider consumer choice
o Technological innovation which promotes dynamic efficiency
o Effective price competition between suppliers
There are four key pillars of competition policy in the UK and in the European Union

1. Antitrust & cartels: This involves the elimination of agreements that seek to restrict competition including price-fixing and other abuses by firms who hold a dominant market position (defined as having a market share in excess of forty per cent).

2. Market liberalisation: Liberalisation involves introducing fresh competition in previously monopolistic sectors such as energy supply, postal services, mobile telecommunications and air transport.

3. State aid control: Competition policy analyses examples of state aid measures to ensure that such measures do not distort competition in the Single Market

4. Merger control: This involves the investigation of mergers and take-overs between firms (e.g. a merger between two large groups which would result in their dominating the market).
The Regulators
Regulators are the rule-enforcers and they are appointed by the government to oversee how a market works and the outcomes that result for both producers and consumers. Examples of regulators include the Office of Fair Trading and the Competition Commission. The European Union Competition Commission is also an important body for the UK economy.
What do the regulators regulate?
1. Prices: Regulators aim to ensure that companies do not exploit monopoly power by charging excessive prices. They look at evidence of pricing behaviour and also the rates of return on capital employed to see if there is evidence of 'profiteering.' Recently the EU Competition Commission made a ruling on the 'roaming' charges of mobile phone operators in the EU and helped to enforce a new maximum price on such charges.

2. Standards of customer service: Companies that fail to meet specified service standards can be fined or have their franchise / licence taken away. The regulator may also require that unprofitable services are maintained in the wider public interest e.g. BT keeping phone booths open in rural areas and inner cities; the Royal Mail is still required by law to provide a uniform delivery service at least once a day to all postal addresses in the UK

3. Opening up markets: The aim here is to encourage competition by removing barriers to entry. This might be achieved by forcing the dominant firm in the industry to allow others to use its infrastructure network. A key task for the regulator is to fix a fair access price for firms wanting to use the existing infrastructure. Fair both to the existing firms and also potential challengers.

4. Regulation can act as a form of surrogate competition - attempting to ensure that prices, profits and service quality are similar to what could be achieved in competitive markets.
In a nut shell the role of competition authorities around the world is to protect the public interest, particularly against firms abusing their dominant positions
Anti-Trust Policy - Abuses of a Dominant Market Position
A firm holds a dominant position if its power enables it to operate within the market without taking account of the reaction of its competitors or of intermediate or final consumers.

Competition authorities consider a firm's market share, whether there are credible competitors, whether the business has ownership and control of its own distribution network (achieved through vertical integration) and whether it has favourable access to raw materials.

Holding a dominant position is not wrong if it is the result of the firm's own competitiveness against other businesses! But if the firm exploits this power to stifle competition, this is deemed to be an anti-competitive practice.

Anti-competitive practices are designed to limit the degree of competition inside a market.
Examples of anti-competitive practices
1. Predatory pricing also known as 'destroyer pricing' happens when one or more firms deliberately sets prices below average cost to incur losses for a sufficiently long period of time to eliminate or deter entry by a competitor - and then tries to recoup the losses by raising prices above the level that would ordinarily exist in a competitive market.

2. Vertical restraint in the market: This can happen in a number of ways:

a. Exclusive dealing: This occurs when a retailer undertakes to sell only one manufacturers product. These may be supported with long-term contracts that "lock-in" a retailer to a supplier and can only be terminated by the retailer at high financial cost. Distribution agreements may seek to prevent instances of parallel trade between EU countries (e.g. from lower-priced to higher priced countries).

b. Territorial exclusivity: This exists when a particular retailer is given the sole rights to sell the products of a manufacturer in a specified area.

c. Quantity discounts: Where retailers receive larger price discounts the more of a given manufacturer's product they sell - this gives them an incentive to push one manufacturer's products at the expense of another's.

d. A refusal to supply: Where a retailer is forced to stock the complete range of a manufacturer's products or else he receives none at all, or where supply may be delayed to the disadvantage of a retailer.

3. Collusive practices: These might include agreements on market sharing, price-fixing and agreements on the types of goods to be produced.

Not all instances of collusive behaviour are deemed to be illegal by the European Union Competition Authorities. Practices are not prohibited if the respective agreements "contribute to improving the production or distribution of goods or to promoting technical progress in a market."

o Development of improved industry standards /technical standards of production and safety which eventually benefit the consumer.

o Research joint-ventures and know-how agreements which seek to promote innovative and inventive behaviour in a market.

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A2 Micro: Competition Policy | tutor2u Economics

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The aim of competition policy is promote competition; make markets work better and contribute towards improved efficiency in individual markets and enhanced competitiveness of UK businesses within the European Union single market.

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Competition authorities consider a firm's market share, whether there are credible competitors, whether the business has ownership and control of its own distribution network (achieved through vertical integration) and whether it has favourable access to raw materials.

Holding a dominant position is not wrong if it is the result of the firm's own competitiveness But if the firm exploits this power to stifle competition, this is an anti-competitive practice.

Anti-competitive practices are designed to limit the degree of competition inside a market.

Examples of anti-competitive practices

1. Predatory pricing also known as 'destroyer pricing' happens when one or more firms deliberately sets prices below average cost to incur losses for a sufficiently long period of time to eliminate or deter entry by a competitor - and then tries to recoup the losses by raising prices above the level that would ordinarily exist in a competitive market.

2. Vertical restraint in the market: This can happen in a number of ways:

Exclusive dealing: This occurs when a retailer undertakes to sell only one manufacturers product. These may be supported with long-term contracts that "lock-in" a retailer to a supplier and can only be terminated by the retailer at high financial cost. Distribution agreements may seek to prevent instances of parallel trade between EU countries (e.g. from lower-priced to higher priced countries).

Territorial exclusivity: This exists when a particular retailer is given the sole rights to sell the products of a manufacturer in a specified area.

Quantity discounts: Where retailers receive larger price discounts the more of a given manufacturer's product they sell - this gives them an incentive to push one manufacturer's products at the expense of another's.

A refusal to supply: Where a retailer is forced to stock the complete range of a manufacturer's products or else he receives none at all, or where supply may be delayed to the disadvantage of a retailer.

3. Collusive practices: These might include agreements on market sharing, price-fixing and agreements on the types of goods to be produced.
Price Fixing and the Law
UK competition law prohibits almost any attempt to fix prices - for example, you cannot

1. Agree prices with competitors or agree to share markets or limit production to raise prices.

2. Impose minimum prices on different distributors such as shops.

3. Agree with your competitors what purchase price you will offer your suppliers.

4. Cut prices below cost in order to force a weaker competitor out of the market.

5. Under the Competition Act 1998 and Article 81 of the EU Treaty, cartels are prohibited. Any business found to be a member of a cartel can be fined up to 10 per cent of its worldwide turnover. In addition, the Enterprise Act 2002 makes it a criminal offence for individuals to dishonestly take part in the most serious types of cartels. Anyone convicted of the offence could receive a maximum of five years imprisonment and/or an unlimited fine.

Horizontal Cooperation: Joint Research Project launched to tackle MRSA
GlaxoSmithKline and AstraZeneca have won Euro200 million of funding from the European Commission to fund a joint research project seeking to find a new class of antibiotics. The bid comes as evidence grows of the huge financial and social cost from over 25,000 annual deaths in Europe from superbugs acquired in hospital. Traditionally antibiotics make low profits for pharmaceutical businesses as they are rationed by doctors and hospitals to avoid a buildup of resistance and patients are given a course of treatment for their infections.

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Anti-Trust Policy - Abuses of a Dominant Market Position | tutor2u Economics

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Competition authorities consider a firm's market share, whether there are credible competitors, whether the business has ownership and control of its own distribution network (achieved through vertical integration) and whether it has favourable access to raw materials.

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Competition Policy - Market Liberalisation | tutor2u Economics

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Merger Policy in the UK and the European Union | tutor2u Economics

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Application - Examples of Competition Regulation

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Application - Examples of Competition Regulation

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Postage Price Cap + Quality Assurance Control -

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Postage Price Cap + Quality Assurance Control -

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The industry was liberalised / opened up to competition firstly in parcels and more recently in the market for collecting, sorting and delivering household and business mail. The near monopoly of the Royal Mail has come under increasing threat and challenge from a growing number of new entrants who have been granted a licence to operate in the UK - these new players include TNT, UK Mail and DHL.

The regulatory structure of the industry has changed - the Postal Services Act 2011 transferred regulation of postal services from PostComm to Ofcom. A key part of the UK postal industry is the existence of a universal postal service - this has two parts:

1.A national mail network - including once a day delivery to every postal address in the UK

Royal Mail is required to deliver six days a week

93% next day delivery target

2.An affordable universal tariff / pricing system - delivering a fair rate of return for postal businesses but also taking into account affordability for all consumers

The Royal Mail Group is the only licenced business in the UK thought capable of meeting this universal postal service. Royal Mail has made big efforts in recent years to increase efficiency and cut costs but they face the problem of a long-term fall in the volume of first and second class mail being sent (there are many cheaper alternatives!). They make a loss on each second class letter sent; this is largely funded by profits elsewhere in the mail market and exploiting economies of scale from their postal network. In 2011, the Royal Mail's Letters & Parcels International business had an operating loss of £120 million.

Competition has posed many challenges for the Royal Mail, since the market was opened up to new licenced businesses, competitors have been winning business to collect and sort mail, paying to use Royal Mail's delivery network. In 2011, Ofcom gave the Royal Mail more commercial freedom to set postage charges over a seven year period. On 31 March 2014, the price of a First Class stamp rose by 2p to 62p and the price of a Second Class stamp rose by 3p to 53p. The price of a First Class Large Letter stamp increased by 3p to 93p and a Second Class Large Letter stamp by 4p to 73p
UK Stamp price changes in April 2014
Will these stamp price increases lead to a steep decline in the volume of mail sent? The answer depends on the price elasticity of demand for postal services. Digital competition will probably be an effective deterrent to the Royal Mail if it wants to raise stamp prices further. The regulator also stands by to see if improved financial performance is largely the result of stamp price hikes or more favourably, the end product of improvements in productive efficiency throughout the business.
End to end competition in the UK postal market
As of 2014, TNT Post are now in direct competition with Royal Mail in parts of London, Liverpool and Manchester - they now provide a full 'end-to-end' service in these areas, delivering business post directly to the addresses of customers
Royal Mail privatisation
In October 2013 the Royal Mail was part privatised

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Competition Policy - Postage Prices in the UK | tutor2u Economics

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The industry was liberalised / opened up to competition firstly in parcels and more recently in the market for collecting, sorting and delivering household and business mail. The near monopoly of the Royal Mail has come under increasing threat and challenge from a growing number of new entrants who have been granted a licence to operate in the UK - these new players include TNT, UK Mail and DHL.

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Payday lenders such as Wonga offer short-term, high interest loans to consumers, with the suggestion that the money is paid back within a month, when they receive their next pay cheque. Unlike standard secured or unsecured loans, payday loans are short-term borrowing solutions aimed at those facing immediate financial difficulty.

The payday loans industry has come under increasing criticism in recent years and this helped bring about an investigation by the Competition and Markets Authority (CMA) into the practices of the main lenders. as a result, the CMA has chosen to act with a direct cap (ceiling) on the daily interest rate that can be charged.

Payday lenders have been criticised by some bodies (such as Citizens Advice) for making it too easy for a vulnerable person to „over borrow‟ at high interest, thereby creating long term financial hardship.
Regulation
The CMA has taken action to:

Introduce a cap on interest rates charged on loans - this price cap came into effect in January 2015 - read this article

Borrowers must never have to pay back more in fees and interest than the value of the loan, representing a total cost cap of 100 per cent

Reduced the fees that payday lenders can charge for arranging a loan

Introduce a cap on the fee that can be charged if a borrower defaults - that fee will be £15

Ruled that payday lenders must list their loan rates on at least one price comparison site in order to improve competition and price transparency in the industry - read this article

These interventions will have the effect of lowering the revenue from operating in the market. Given the high fixed costs that many of the lenders have, a fall in revenue directly reduces the profits from lending and the forecast is that low returns will cause the exit of many businesses from the market and a big round of cost-cutting (including job losses) for those firms that remain.

Find more statistics at Statista

Find more statistics at Statista

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Regulation of Payday Loans (Financial Economics) | tutor2u Economics

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The UK Competition and Markets Authority (CMA) has intervened directly in the market for payday loans. The result will be a sharp fall in the rate of profit for payday lenders and it is likely that all but a few of the major loan providers will be forced out of the market.

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UK Competition Policy - A3 Summary Sheet

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What are Public Private Partnerships - bbc article with table

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Competition Policy - Key words matching - Questions

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Notes

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Competition policy aims to ensure

Technological innovation which promotes dynamic efficiency in different markets

Effective price competition between suppliers

Safeguard and promote the interests of consumers through increased choice and lower price levels

There are four key pillars of competition policy in the UK and in the European Union

1. Antitrust & cartels: This involves the elimination of agreements that restrict competition including price-fixing and other abuses by firms who hold a dominant market position (defined as having a market share in excess of forty per cent)

2. Market liberalisation: Liberalisation involves introducing competition in previously monopolistic sectors such as energy supply, retail banking, postal services, mobile telecommunications and air transport

3. State aid control: Competition policy analyses state aid measures such as airline subsidies to ensure that such measures do not distort the level of competition in the Single Market

4. Merger control: This involves the investigation of mergers and take-overs between firms (e.g. a merger between two large groups which would result in their dominating the market)

Main Roles of the Regulators

Regulators are the rule-enforcers and they are appointed by the government to oversee how a market works and the outcomes that result for producers and consumers

The main competition regulator in the UK is the Competition and Markets Authority (CMA)
Examples of competition policy in action

De-regulation - laws to reduce monopoly power

Preventing mergers/acquisitions that create a monopoly

Laws to introduce competition into the postal services industry

Forced sales of assets e.g. BAA and airports in the UK

Privatisation - transferring ownership

Stock market floatation of the Royal Mail

Part-privatisation of Network Rail similar to the sell-off of HS1 - the high-speed link that connects London's St Pancras to the Channel tunnel, on a long-term concession

Tough laws on anti-competitive behaviour

Strong laws and penalties against proven cases of price fixing or collusion that involves market sharing

Companies breaching EU and UK competition rules risk hefty fines of up to 10 per cent of global turnover - senior executives can be jailed

Reductions in import controls

A reduction in import tariffs encourages cheaper products from overseas

Increasing or eliminating import quotas can also have the same effect

Allowing new countries into the European Union single market increases contestability

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Competition Policy in Markets and Industries | tutor2u Economics

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Competition policy aims to ensure Technological innovation which promotes dynamic efficiency in different markets Effective price competition between suppliers Safeguard and promote the interests of consumers through increased choice and lower price levels There are four key pillars of competition policy in the UK and in the European Union Antitrust

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Why does the government intervene in markets to maintain competition?

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Competition Policy - Key Terms | tutor2u Economics

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The aim of competition policy is promote competition; make markets work better and contribute towards improved efficiency in individual markets and enhanced competitiveness of UK businesses within the European Union single market.

Competition policy aims to ensure
o Wider consumer choice
o Technological innovation which promotes dynamic efficiency
o Effective price competition between suppliers
There are four key pillars of competition policy in the UK and in the European Union

1. Antitrust & cartels: This involves the elimination of agreements that seek to restrict competition including price-fixing and other abuses by firms who hold a dominant market position (defined as having a market share in excess of forty per cent).

2. Market liberalisation: Liberalisation involves introducing fresh competition in previously monopolistic sectors such as energy supply, postal services, mobile telecommunications and air transport.

3. State aid control: Competition policy analyses examples of state aid measures to ensure that such measures do not distort competition in the Single Market

4. Merger control: This involves the investigation of mergers and take-overs between firms (e.g. a merger between two large groups which would result in their dominating the market).
The Regulators
Regulators are the rule-enforcers and they are appointed by the government to oversee how a market works and the outcomes that result for both producers and consumers. Examples of regulators include the Office of Fair Trading and the Competition Commission. The European Union Competition Commission is also an important body for the UK economy.
What do the regulators regulate?
1. Prices: Regulators aim to ensure that companies do not exploit monopoly power by charging excessive prices. They look at evidence of pricing behaviour and also the rates of return on capital employed to see if there is evidence of 'profiteering.' Recently the EU Competition Commission made a ruling on the 'roaming' charges of mobile phone operators in the EU and helped to enforce a new maximum price on such charges.

2. Standards of customer service: Companies that fail to meet specified service standards can be fined or have their franchise / licence taken away. The regulator may also require that unprofitable services are maintained in the wider public interest e.g. BT keeping phone booths open in rural areas and inner cities; the Royal Mail is still required by law to provide a uniform delivery service at least once a day to all postal addresses in the UK

3. Opening up markets: The aim here is to encourage competition by removing barriers to entry. This might be achieved by forcing the dominant firm in the industry to allow others to use its infrastructure network. A key task for the regulator is to fix a fair access price for firms wanting to use the existing infrastructure. Fair both to the existing firms and also potential challengers.

4. Regulation can act as a form of surrogate competition - attempting to ensure that prices, profits and service quality are similar to what could be achieved in competitive markets.
In a nut shell the role of competition authorities around the world is to protect the public interest, particularly against firms abusing their dominant positions
Anti-Trust Policy - Abuses of a Dominant Market Position
A firm holds a dominant position if its power enables it to operate within the market without taking account of the reaction of its competitors or of intermediate or final consumers.

Competition authorities consider a firm's market share, whether there are credible competitors, whether the business has ownership and control of its own distribution network (achieved through vertical integration) and whether it has favourable access to raw materials.

Holding a dominant position is not wrong if it is the result of the firm's own competitiveness against other businesses! But if the firm exploits this power to stifle competition, this is deemed to be an anti-competitive practice.

Anti-competitive practices are designed to limit the degree of competition inside a market.
Examples of anti-competitive practices
1. Predatory pricing also known as 'destroyer pricing' happens when one or more firms deliberately sets prices below average cost to incur losses for a sufficiently long period of time to eliminate or deter entry by a competitor - and then tries to recoup the losses by raising prices above the level that would ordinarily exist in a competitive market.

2. Vertical restraint in the market: This can happen in a number of ways:

a. Exclusive dealing: This occurs when a retailer undertakes to sell only one manufacturers product. These may be supported with long-term contracts that "lock-in" a retailer to a supplier and can only be terminated by the retailer at high financial cost. Distribution agreements may seek to prevent instances of parallel trade between EU countries (e.g. from lower-priced to higher priced countries).

b. Territorial exclusivity: This exists when a particular retailer is given the sole rights to sell the products of a manufacturer in a specified area.

c. Quantity discounts: Where retailers receive larger price discounts the more of a given manufacturer's product they sell - this gives them an incentive to push one manufacturer's products at the expense of another's.

d. A refusal to supply: Where a retailer is forced to stock the complete range of a manufacturer's products or else he receives none at all, or where supply may be delayed to the disadvantage of a retailer.

3. Collusive practices: These might include agreements on market sharing, price-fixing and agreements on the types of goods to be produced.

Not all instances of collusive behaviour are deemed to be illegal by the European Union Competition Authorities. Practices are not prohibited if the respective agreements "contribute to improving the production or distribution of goods or to promoting technical progress in a market."

o Development of improved industry standards /technical standards of production and safety which eventually benefit the consumer.

o Research joint-ventures and know-how agreements which seek to promote innovative and inventive behaviour in a market.

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A2 Micro: Competition Policy | tutor2u Economics

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The aim of competition policy is promote competition; make markets work better and contribute towards improved efficiency in individual markets and enhanced competitiveness of UK businesses within the European Union single market.

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News

Sainsbury's-Asda merger
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Gender pay gap

80% of UK companies and public sectors organisations pay women less than men.
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Zero hours contracts

Nearly 1 million UK workers on zero-hours contracts.
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Model agencies collude to fix rates

Regulators find leading model agencies guilty of price fixing.
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Evaluation of Competition Policy

The Competition Act (1998) and Enterprise Act (2002) gave UK regulators more power to act against abuses of monopoly power.

Very few mergers are actually investigated each year. Indeed, during the immediate five-year period after the Enterprise Act (2002) came into force, not a single major cartel was investigated by the OFT.

Despite heavy fines, covert collusion is difficult to prove. New powers have been given to the regulators to undertake covert surveillance of firms to establish whether collusion is taking place.

Tacit collusion is almost impossible to prove. Statistical techniques could be used to establish correlations between price movements in 'theory' and in practice.

The problem of 'cheating' or 'finding loopholes', such as getting round the regulations by moving into an adjacent market. For example, a large grocery retailer moving into the 'convenience' store market could be seen as a way of circumventing competition policy.

A major criticism is that 'single' markets are inadequately defined. For example, in 2004 the OFT allowed Tesco to purchase Adminstore (the owners of Cullens, Europa and Harts) because it regarded 'convenience stores' to be a separate market from grocery stores. This gave Tesco 6% of the convenience food market as well as 26% of the grocery market. While Tesco argued that the two markets are quite distinct, critics, like the Forum for Private Business, argued that the markets are almost indistinguishable and that Tesco should not have been allowed to enter the convenience food market.

The problem of regulatory capture

One particular criticism of regulation in general is that it is subject to regulatory capture - where the regulator is captured or hijacked by the regulated. This occurs because the regulated subject regulators to intense pressure, often through the lobbying system. Two processes increase the likelihood of regulatory capture - firstly, the increased exposure of regulators to the regulated encourages them to 'see things from their perspective' and develop an understanding of and empathy towards the regulated. This removes their impartiality and weakens their ability to regulate. Secondly, the regulated develop a deep understand of the details of the regulation and can learn how to 'play the system'. Large corporations can allocate vast sums to developing strategies to deal with the regulators. In wider terms, regulatory capture is seen as a form of government failure, and is often seen as evidence that government regulation is not the most effective method of achieving competition and efficiency.

Two examples in the UK have been frequently cited. Firstly, it is claimed that banking regulators, including the FSA and the Bank of England have been perpetual victims of regulatory capture by the banking industry, and that, furthermore, having 'got out of control' the banks wayward behaviour has played a large part in the recent financial crisis. Even the former Governor of the Bank of England, Sir Mervin King, accepted that the complexity and weight of regulation makes it difficult for regulators to operate effectively. The second more recent example is the alleged capture of the tax authorities (HMRC) by the UK's mobile phone giant, Vodafone, who apparently negotiated a £6b tax reduction, reducing their tax bill for 2009-10 from £7b to £1b.

See also:
EU Competition Policy Contestable market theory Banking regulation Financial crisis Transfer pricing

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CPI inflation falls to 2.7%.
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Customs unions

Costs and benefits of customs unions.

Brexit latest

Dominic Raab appointed as Brexit negotiator.
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New materials

Multiple choice papers for Paper Three.
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Brexit update

What trading options are available to the UK?

Savings ratio

Savings ratio falls to lowest level on record.
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Tax avoidance

Double Irish - and a Dutch Sandwich more..

The OECD presents its final package for reform of international tax rules.. more

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News Sainsbury's-Asda merger Read more Gender pay gap 80% of UK companies and public sectors organisations pay women less than men. Read more Zero hours contracts Nearly 1 million UK workers on zero-hours contracts. Read more Model agencies collude to fix rates Regulators find leading model agencies guilty of price fixing.

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privatisation; rate-of-return regulation; price capping; rpi-x; yardstick competition; oft; competition commission; competitive tendering; compulsary competitive tendering

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Discover how public utilities, such as electricity, gas and water supply, are regulated using options such as price-capping and rate-of-return regulation

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UK/EU Competition Policy Privatisation Contestability (deregulation) Regulation Anti-competitive practices Read the articles in pairs then report back to the class: what the anti-competitive action was why the action was anti-competitive Anti-competitive practices Anti competitive practises Include: resale price maintenance refusal to supply a competitor or customer predatory pricing discriminatory pricing policies tie in of non-related goods or services refusing to allow a competitor to use essential services refusing to license intellectual property rights The transfer of assets from the public sector to the private sector Privatisation Is privatisation a failed and corrosive model?