Where market power harms consumers, suppliers or workers, governments step in. This sub-theme is all about the tools they use, their effects, and — crucially for…
Where market power harms consumers, suppliers or workers, governments step in. This sub-theme is all about the tools they use, their effects, and — crucially for evaluation — their limits.
Learning objectives — by the end of 3.5 you can…
- explain measures to control monopolies and mergers and to promote competition; - explain measures to protect suppliers and employees; - assess the impact of intervention on price, profit, efficiency, quality and choice; - evaluate the limits to government intervention and explain labour-market intervention.
Intervention in product markets
Spec: 3.5.1
The case for intervention is to curb the harms of market power — high prices, restricted output and inefficiency — and to protect consumers, suppliers and workers. The toolkit falls into three groups:
| Control monopolies & mergers | Promote competition & contestability | Protect suppliers & employees |
|---|---|---|
| Price regulation (e.g. RPI−X price caps) | Tax incentives & grants for small firms and FDI | Local sourcing of inputs |
| Profit regulation (cap the rate of return) | Deregulation (remove barriers) | Employment legislation against exploitation |
| Quality standards & performance targets | Privatisation | Barriers to foreign firms |
| Referral to regulatory authorities | Competitive tendering for public contracts | Restrictions on monopsony power |
| Merger legislation (block/scrutinise) | Trade liberalisation | Nationalisation |
Examiners want you to judge the impact of each measure on price, profit, efficiency, quality and choice — e.g. a price cap lowers prices and profit but may erode quality and investment.
Limits to government intervention
- Regulatory capture: regulators come to serve the firms they regulate. - Information gaps / asymmetric information: regulators know less than the firm. - Inadequate resources: regulators are out-spent and out-staffed. - Lack of regulatory power: weak sanctions fail to change behaviour.
Intervention in labour markets
Spec: 3.5.2
Governments also intervene to correct labour-market failure — low pay, exploitation, immobility, discrimination and monopsony power. The most testable tool is the minimum wage, a wage floor set above the equilibrium:
| Other labour-market interventions | How they work |
|---|---|
| Maximum wage | A pay cap (e.g. on excessive executive pay). Set below equilibrium it causes excess demand — labour shortages. |
| Direct taxes (NICs, corporation tax) | Employer National Insurance raises the cost of hiring (lowers labour demand); corporation tax affects firms' capacity to invest and hire. |
| Reducing immobility | Training and retraining, relocation subsidies, affordable housing and better job information. |
| Reducing discrimination & exploitation | Anti-discrimination and equal-pay legislation, plus enforcement of employment rights. |
Evaluation — does a minimum wage cost jobs?
Not necessarily. If labour demand is inelastic, or the employer is a monopsony (which was already paying below the competitive wage), a minimum wage can raise pay with little or no fall in employment — and can even raise employment in the monopsony case. The effect always depends on elasticity, the level it is set at, and market structure.
3.5 Recap — nail these
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