The Impact of Government Intervention (Edexcel A Level Economics A)
Revision Note
Written by: Steve Vorster
Reviewed by: Jenna Quinn
The Impact of Government Intervention
The Desired Outcomes Of Government Intervention
Prices | Profit | Efficiency |
|---|---|---|
Affordable and 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 and one of the best ways to achieve this is by developing rigorous competition |
Quality | Choice |
|
Ensuring products are fit for purpose and contribute to a better standard of living | Wider choice improves the standard of living and also helps to improve product quality. More choice also generates more economic activity in an economy and 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 and 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 and there is a fine line between influencing activity and 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 and relevant information - or they do not understand the market they are trying to regulate e.g. many financial markets are fast moving and incredibly complex
This existence of asymmetric information has been responsible for some spectacular government failures
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