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Using the Data and Your Knowledge of Economics Assess the Arguments for and Against the Government Intervening in the Uk Electricity Industry. (25 Marks)

In: Business and Management

Submitted By linzipinzi70
Words 1199
Pages 5
June 2015 Unit 3
Context 1 Q3
‘Critics of Big Six might argue that electricity companies should not have electricity companies should not have been privatised as they can never behave or perform like supermarkets.’ (Extract C, lines 15-16)
Using the data and your knowledge of economics assess the arguments for and against the government intervening in the UK electricity industry. (25 marks) The big six energy firms effectively have an oligopoly on the UK energy market despite the existence of some smaller firms who are mainly involve in the retail aspect of the market (extract A). The market concentration of these firms and the significant profit margins that they enjoy, as referred to in extract B, would suggest that there exists a strong argument in favour of government intervention in order to protect consumer interest. However any government intervention must be based on sound information so as not to further disrupt the market and potentially result in government failure. Furthermore, if the energy companies’ claim of needing these supernormal profits for the purposes of future investment holds true the government would need to consider the long term implications of intervention such as windfall taxes.

Firms in oligopolistic markets have market power and therefore can often use this power to act in an anti-competitive way which is damaging to consumer interests. Given their ability to set prices as oppose to ‘take’ them for the competitive market, the prices charged in these markets are often higher than in competitive markets and as such not allocatively efficient. This can be shown in the diagram below whereby P1 is the price charged by the oligopolistic firm and P2 the price charged by the competitive industry (with the assumption of the same cost…...

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