Regulations (Government Intervention)

Regulations are a form of government intervention in markets - there are many examples we can use:

Examples include:

• Laws on minimum age for buying cigarettes and alcohol
• The Competition Act which penalizes businesses found guilty of price fixing cartels
• Statutory national minimum wage
• A new law in Scotland banning under-18s from using sun-beds
• Equal Pay Act and acts preventing other forms of discrimination
• Changes in the law on cannabis
• Maximum CO2 emissions for new vehicles, laws which restrict flight times at night
• Government appointed utility regulators who may impose price controls on privatized monopolists e.g. telecommunications, the water industry

The economy operates with a huge and growing amount of regulation. The government appointed regulators who can impose price controls in most of the main utilities such as telecommunications, electricity, gas and rail transport.

Free market economists criticize the scale of regulation in the economy arguing that it creates an unnecessary burden of costs for businesses – with a huge amount of "red tape" damaging the competitiveness of businesses.

Regulation may be used to introduce fresh competition into a market – for example breaking up the existing monopoly power of a service provider. A good example of this is the attempt to introduce more competition for British Telecom. This is known as market liberalization.

Problems that regulators of markets / industries can face

1. Hard to find evidence of anti-competitive behaviour:
   • Lack of spoken or written evidence
   • Conflicting or asymmetric information
   • Complex information
   • Conflicting evidence – e.g. it might be markets forces or collusion in an oligopoly
2. Fear of fines or other control mean that there is strong incentive to conceal collusion
3. Lack of regulator power and lack of regulator resources

Revision Video: Evaluating Government Intervention in Markets

Carbon Emissions - Evaluating Potential Policies

This is a revision video looking at carbon trading and carbon taxes as policies to cut emissions. Most economists favour carbon taxes but public support for new environmental taxes in many countries is relatively low.

Evaluating Carbon Policies from tutor2u

Carbon Trading and Carbon Taxes (Evaluation Skills Video)

In this short revision video we analyse and evaluate three key points relating to this question: "To what extent are tradable permits less effective than taxation in reducing CO2 emissions?"

Core Notes:

A rising price of carbon permits – in theory – gives firms an incentive to invest in new technologies that lower carbon emissions.

Eval: But if the carbon price is too low or volatile from year to year, the risks from investment will be hard to justify to shareholders and fewer firms will commit to this.

Carbon trading helps to cut emissions in the lowest cost way because each permit is worth more to the most carbon-efficient businesses.

Eval: Carbon trading raises less revenue than a carbon tax; this revenue could be used to fund investment in renewables or help finance improvements in human capital.

The UK government has introduced a carbon price floor to make the EU trading scheme more effective in cutting CO2 emissions.

Eval: Carbon price floors make domestic businesses less price competitive overseas. A carbon tax provides just as much certainty for firms.