Regulation of Monopoly and Competition Policy in the UK - Assignment Example

 Economics for Business and Management QUESTION 1 Why do some people believe that the market system is the best mechanism for allocating scarce resources and thereby encouraging a positive ‘investment climate’? Explain your reasoning. Market economic system In the market economic the three most important economic questions of how to produce? Where to produce? And for whom to produce? Are answered by the free market. The prices of products and services are determined by the price mechanism using the free market forces of demand and supply. More freedom Some people consider it as the best mechanism for allocating scarce resources because in a market economic system the producers can easily switch their productions from the less profitable products to the more profitable products without any restrictions. Therefore individuals have complete freedom as to what they buy or what they sell. The market is free from government controls and protocols. These lack of government controls and regulations make it easier for people to start up new businesses and invest in new projects without much hassle. It promotes healthy competition which may also lower the prices and lead to the production of new innovative products which will benefit the consumers with variety at affordable prices. (Klein, 2009) Allocative efficiency In the market economic system which is free market with no government intervention, the firms are profit maximisers and hence make sure that whatever capital they invest gives them the maximum possible return. This feature of the market economy will help in expanding the total size of a country’s economy to the maximum. An expanding economy implies positive investment climate with greater returns on investment Furthurmore, in a market economic system, there is more freedom for labor to select their jobs and for business persons to the kind of business they want to start. This greater economic freedom would mean that wealth will create wealth and people can achieve a better quality of life for their families and for themselves. (Mickelsen, 2009) Innovation Most importantly, a market economic system encourages competition. This increased level of competition can be very beneficial in terms of innovation and increased efficiency because then firms do whatever they think is important to be done. For example, to reduce its production costs a firm may lay off some workers which can also be a motivating factor for the labor to work hard to secure their jobs. As a result more efficiency is there and better quality products are being produced. In short, the scarce resources of the economy are being used as efficiently as they could possibly be used. (Klein, 2009) And innovation will obviously be there because of increased competition which will force the existing firms to produce new and better and cheaper products. A resulting positive impact on the economy will by itself then create a positive investment climate for both local and foreign investors. Moreover the profits of the existing firms will also attract other investors who are looking for new opportunities of earning profit. (Ollman, 1999) The market system is very efficient because the resources available to a nation are organized in such a way that they will produce maximum possible output. Even for the consumers there is now more variety of products in the market which will directly affect their standards of living. (Ollman, 1999) Question 2 Why do some people believe that not everything can be left to the free market, but that governments also have a role to play in encouraging a positive ‘investment climate’? Explain your reasoning. Why government intervenes? Governments usually intervene because a free market is associated with an unequal distribution of income. A market system where a central government takes decisions of what to produce, how to produce and where to produce is known as the command economic system. Therefore in a free market, the government intervenes to protect the unlucky members of society. (Geoff Riley, 2006) In a free market price mechanism determines the prices of the goods being sold. Some people believe that everything cannot be left on to the free market and the government needs to play a role as well to foster investment. The government itself may choose to intervene mainly because it is aiming to achieve economic and social welfare as part of its policy unlike the private firms which solely aim to maximize their profits even if it’s at the cost of social welfare. To do this the government accordingly changes the allocation of resources in an economy. The main reason for government intervention is to get rid of market failure by accomplishing an equal distribution of income. This means that on average individuals will be better off and overall level of appending in the economy will take an upward trend. This increased spending and demand will have a positive impact on the Gross Domestic Product and will eventually enhance the performance of any economy hence, fostering a more positive investment climate. (Geoff Riley, 2006) At times the firms in a free market tend to exploit the consumers by charging high prices for utilities so government intervention is then necessary to place price controls especially on utilities like telecommunication, gas, rail transport and electricity. How does state intervene? There are many different ways in which the state intervenes in the functioning of the free market forces. The most common of these is through government regulation and legislation. The government wants to encourage the production of merit goods and discourage the production of demerit goods by the private sector. There can be laws passed which restrict the production and selling of demerit goods like cigarettes or alcohol, laws that would ban smoking in public places. Furthermore there could also be laws against the formation of monopolies under the competition policy of the government. These laws would restrict anti-competitive practices in which the firms usually engage. These policies and this form of government intervention fosters economic growth by letting the domestic industries involve in healthy competition and hence thrive. This kind of intervention definitely promotes a positive investment climate by removing barriers to entry for new firms that wish to enter a market and by providing equal opportunities to all. Government also intervenes thorough its employment laws in which there are rules to protect the rights of laborers by setting a fix standard for workplace conditions and also by setting minimum wages. Fiscal Policy Intervention Fiscal policy intervention by the government can create a very healthy investment climate. This kind of intervention is used by using tools like taxes, subsidies and welfare payments. The use of direct and indirect taxes can help. By using its indirect taxes the government can influence market demand for products and increase or decrease the level of inflation in an economy or it can decide to stabilize the economy to foster investment in a more secure climate. The government also tries to influence the overall distribution of income in an economy by giving welfare payments and charging progressive income taxes. Subsidies can be given to encourage investment usually in markets where private firms are reluctant to invest in or at special locations where the government wants factories to be built it may give subsidies. Monetary policy intervention In monetary policy intervention, the government tries to influence investment by use of monetary instruments of interest rates and money supply. By reducing interest rates and increasing the money supply in an economy the government encourages borrowing and hence investment Question 3 Suggest some actual government policies that might be used in your country (name the country) To improve the ‘investment climate’. Explain your reasoning. Investment in any country or any business area largely depends on careful judgments made by the investors. Talking about Pakistan, in spite of the very attractive business opportunities available here we see that the trend in investment has been declining or say not at the level where it could have been. This was significantly because of the unstable attitudes and policies of the previous governments in the country. The government policies that may be used to improve the investment climate in Pakistan: First of all the government of Pakistan needs to make the promotion of business investment as one of its most crucial policies in achieving economic growth. Pakistan is a developing economy and investment, especially foreign investment, plays a key role in the progress of any developing country. Providing tax incentives to foreign investors will encourage more foreign investment (Butt, 2010) The government also needs to make sure that it provides the basic facilities like that of good infrastructure and electricity efficiently at subsidized rates. One good thing about Pakistan that attracts investment here is that cheap labor is available .the government of Pakistan needs to capitalize on its most abundant human recourse by providing better training and education facilities to them. The government should get rid of its protectionist policies to encourage more foreign investment and make place for free trade. The government should make an effort to support small firms especially those which are suffering from losses due to lack of funds. Giving of subsidies to such weaker businesses can be of help too. (Hussain, 2010) The government of Pakistan can use both its fiscal and monetary policy instruments to attract more investment in the country. Fiscal policy: The government of Pakistan can use its fiscal policy instruments like direct and indirect taxes and government expenditure to foster a positive investment climate. Increasing public expenditure will create more employment in the country and a rising GDP level will eventually led to economic growth. On the other hand a reduction in direct taxes would increase the purchasing power of the people, creating more demand in the economy. These are known as expansionary fiscal policies which will help in expanding the economy and eventually lead to economic growth in the long run. Monetary policy Monetary policy instruments the government can use to attract investment are the interest rate and money supply in an economy. Interest rate is the cost of borrowing. A lower interest rate is meant to encourage borrowing and hence investment. The government of Pakistan can lower its interest rate which will result in an increase in the money supply and investment. And lastly the government of Pakistan should keep reviewing and adjusting its policies from a time to time basis. It can learn from the policies of the developed and successful nations and accordingly modify and review its policies. PART B Why do some observers criticize companies that have monopoly power in a market while others argue that such power can be beneficial to consumer interests? Then, with reference to a country of your choice, briefly discuss the ways in which the government of that country has introduced specific policies to counteract the abuses of monopoly power Whether a monopoly market is beneficial or not is a debatable topic. The conclusion, when judging the economic welfare, seems to be that the economic case for and against monopoly should be distinguished on a case to case basis. Economic inefficiency of a monopoly Some observers criticize companies that have monopoly power because of the economic inefficiency of a monopoly, that is, with a same cost structure a company with monopoly power will produce a lower output and charge a relatively higher price when compared to a competitive industry. This price and quantity setting of a monopoly power leads to a net loss of economic welfare because the price goes higher than the marginal cost which will result in allocative inefficiency. A monopoly is also productively inefficient because it’s not producing at minimum average cost. (academy, 2009) Supernormal profits The supernormal monopoly profits lead to an unequal distribution of income. A monopoly firm exploits it market power in a lot of ways, it restricts the entry of other firms by using barriers to entry .it can also withhold the supply of a product in the market and raise prices to n unacceptable levels as it’s the only supplier of the product .it may also pay lower prices to suppliers. Lack of innovation The critiques of monopoly power also argue that monopoly firms or companies do not promote technical change nor do they invest in expensive research and development programs, in short they are less innovative because there is no incentive to innovate. Since a monopoly firm already has a protected position it has no fear of losing its customers to any rival firm, it is not driven to pioneering himself and hence hinders progress and innovation. (R.Pettinger, 2008) Economies of scale However a monopoly can also be beneficial to consumer interests in a lot of ways. Initially because companies with monopoly power often supply goods and services on a large scale which will enable them to take advantage of the economies of scale because of which the overall average costs of production will fall. This falling average costs will lead to an increase in he profits of the monopoly producer who will then pass some of these gains to the consumers in the form of lower prices for the goods and service being offered. (R.Pettinger, 2008) Research and Development On the other hand it is believed that again because of the presence of external forces and competition arising from international producers, the monopoly firm will feel the pressure to spend time and money in R&D in order to safeguard its position. (Depoorter, 1999) Monopoly firms earn surplus profits because their prices are higher and output is lower than the perfectly competitive firms. Because of the supernormal monopoly profits, monopoly firms will have enough funds to invest in technical innovation and R&D as compared to competitive firms. Moreover, as the monopoly firm is the only one supplying in the market he would spend less on advertising and other promotional expenses and use other cost effective techniques of production. And it will be easier to study the demand curve for the product and the firm will easily and quickly respond to any changes in demand compared to the perfectly competitive firms. (academy, 2009) Furthermore, monopoly firm being the sole supplier will be large in size and will reap more economies of scale. Size is also positively related wit stability and the availability of funds to invest in r and d programs. However, the critiques of monopoly power argue that as firms grow larger their efficiency declines probably because of lack of managerial control. Regulation of monopoly What is regulation? Regulation is a set of rules made by the government designed to get rid o market failure. In terms of monopoly power through its regulations, the government tries to control all such operations which are in opposition to public interest and will thus, control the companies having monopoly powers As a consequence of the deadweight loss of monopoly arising from its productive and allocative inefficiency, the governments of many countries try to regulate some monopolies. The regulatory policies control the price increases and encourage competition in the industries. Monopolies develop into free markets in either of the following ways: An increasing market share of one firm in a particular market because of its successful products or marketing. For example, Microsoft’s monopoly in computer operating systems. The merger of two companies, or a takeover of one company by another in same industry. The United Kingdom’s government is very much concerned about the large firms that gain monopoly power and makes sure that markets are regulated. Even in the United States monopolies have been called as illegal. Therefore, according to the US law any monopoly that is formed shall be broken up. (Depoorter, 1999) In the United Kingdom the Competiton Committee, formerly known as the Monopolies and Mergers Commission, plays an important role in regulating the monopolies formed. The Office of Fair Trading (OFT) according to the competition and consumer law in the UK refers cases to MMC which it investigates then. (academy, 2009) Specifically talking about the UK, it is in most of the cases, an increasing market share of one firm that threatens competition and creates market dominance. Therefore, any firm or company that controls more than 25% of the market share in a particular market is not allowed to operate. In cases where two companies that have merged and together hold at least 25% market share, could also be investigated by the Monopolies and Mergers Commission. In cases where two companies that have merged together hold gross assets of a worth more than 30 million could be investigated by the Monopolies and Mergers Commission. In the UK it is basically the director general of the Fair Trading who is responsible for monitoring the competition policy and refers the investigations to be conducted to the Monopolies and Mergers Commissions. The director general himself works from the Office of Fair Trading. (academy, 2009) The Monopolies and Mergers Commission The Monopolies and Mergers Commission, under the Fair Trading Act, was again established in 1973 and adopted the Competition Act from 1980. The main responsibility of the commission was to investigate when and where there was a risk of a monopoly being created by a merger of takeover and then report that case. Moreover, any companies, local authorities or even nationalized industries that were suspected to be operating in an uncompetitive way were also investigated. (academy, 2009) Then in the Competition Act of 1998, the Competiton Commission came into being and had two main responsibilities, To report any references given by the director general of Fair Trading Responding to any appeals against the Competition Act of 1998 Regulation of monopoly and competition policy Anti competitive agreements that the Competiton Commission of the UK does not allow are: Prohibitions fixing of selling prices to uncompetitive levels limiting investment, hindering technical development or reducing the output abuse of market power (academy, 2009) Some examples which clarify the anti monopoly creation policies of the government in the UK market are: British Gas: the British government expanded the completion n the British Gas market to avoid the monopoly of BG by bringing in more gas suppliers and fixing the gas charges being charged by BG. British Telecommunication was also prevented from becoming a monopoly by encouraging completion in the telecommunications market which has developed and introduced new services. (academy, 2009) Bibliography Academy, b. (2009). Competition Law, UK Monopolies and Mergers Commission. Retrieved december 7, 2010, from blacksacademy.net: http://www.blacksacademy.net/content/3327.html Butt, T. (2010). investment in Pakisten. Retrieved december 7, 2010, from Barrister Tehseen But and Associates: http://www.tahseenbutt.com/investment_in_pakistan.html Depoorter, B. W. (1999). regulation of natural monopoly. Retrieved december 6, 2010, from scribd: http://www.scribd.com/doc/239525/Regulation-of-a-Natural-Monopoly Geoff Riley, E. C. (2006, september). AS Market Failure . Retrieved december 6, 2010, from tutor2u: http://tutor2u.net/economics/revision-notes/as-marketfailure-government-intervention-2.html Hussain, S. (2010, feb 6). Investment Policy In Pakistan. Retrieved december 7, 2010, from Articlesbase: http://www.articlesbase.com/international-business-articles/investment-policy-in-pakistan-1829282.html Klein, P. (2009). monopoly:advantages and disadvantages. Retrieved december monday, 2010, from empirical research: http://www.pauklein.com/monopoly/monopoly.htm Mickelsen, B. (2009, february 26). advantages of a free market economy in America. Retrieved december 6, 2010, from business and finance: http://www.associatedcontent.com/article/1508600/advantages_of_a_free_market_economy_pg3.html?cat=3 Ollman, B. (1999, ocober). Market Economy: Advantages and Disadvantages. Retrieved december 6, 2010, from dialectical marxism: http://www.nyu.edu/projects/ollman/docs/china_speech2.php R.Pettinger, T. (2008, june 11). Policies to reduce Problems caused by Monopolies. Retrieved december 6, 2010, from economics.help: http://www.economicshelp.org/blog/monopoly/policies-to-reduce-problems-caused-by-monopolies/ Read More