Arguments for and Against Regulation

Arguments for government regulation

Key concepts:

  • Unregulated markets may fail – a misallocation of resources.

  • Regulation has done much to improve the quality of life for consumers and employees and give them more rights. Products are generally safe.

  • Competition provides goods and services at lower prices, increasing standards of living and wellbeing.

  • Regulation defends small businesses and defeats monoposonies

  • Students should be aware that the EU single market was designed to create a level playing field for all business, leading to strong competition with rules that are fair to all. Harmonising regulation makes this a reality.

Arguments against government regulation

Key concepts:

  • Adds to costs and pushes up prices. Safe working environments, the living wage, and meeting EU product standards all raise business costs.

  • Compliance with regulation can cause delays.

  • Regulation is often ineffective and misguided – with gov failure adding to market failure.

  • Not being able to collude with one another may force them to compete on price.

  • There is a trade-off between employee protection regulations and the level of employment/job creation.

– Flexible labour markets in the UK (UK already has less employment protection than many similar economies) and the Netherlands have been credited with facilitating lower rates of unemployment and livelier job creation.

– Germany got good results from similar structural reforms in the labour market of the early 2000s.

– The French government is aware of the need for similar policies as it grapples with high unemployment. E.g. French gain right to avoid work e-mails outside of working hours

  • Almost all regulation has some potential to reduce profitability, so businesses typically complain about regulation and lobby politicians to try to reduce it.

‘Fear the Boom and Bust’ a Hayek vs. Keynes Rap Anthem

Another debate arises here!

  • Theme 4 focuses on the extent to which the gov should be involved in our economy.

  • It’s a big focus of your pre-release as well: “This year the context is government intervention and market failure in the UK.

  • To summarise: Keynes is for gov intervention. Hayek is for the free market.

  • Hayek thought free markets tended toward a workable equilibrium that reflected people’s desires and choices.

  • The new Keynesian ideas believed that free markets sometimes guided economies into ditches from which only concerted government action could pull them out.

  • Hayek would support the ‘Japanese Laissez-faire’ approach.

  • Keynes would support the Labour ‘spend money to make money’ appraoch.

  • Are you a Hayek or Keynes backer? To what extent should the gov be involved in an economy?

Arguments for and Against Regulation, figure 1

Exam Style Question

Data Response question on business regulation

Extract A. GSK: It’s happened again

On February 12th 2016 the Competition and Markets Authority (CMA) announced its biggest-ever fine. British pharmaceutical giant GSK was fined £37m for illegally stifling the launch of a cheap rival to its Seroxat antidepressant. For GSK, Seroxat was a major money-spinner, launched in 1991 and with annual sales of more than £1,550 million by 2000. But its patent was about to expire, in 2003. Seeing that drugs-producers such as Teva of Israel and Merck of Germany were about to launch lower-cost copycat rivals, GSK effectively bought them off. It paid its rivals not to launch a rival product for about two years beyond the patent expiry date.

The Competition and Markets Authority said GSK was guilty of “illegal behaviour designed to stifle competition at the expense of NHS and taxpayers”. And went on to argue that the deal was designed to “prevent, restrict or distort competition”. The copycat drugs manufacturers who received the payments were also fined. When, eventually, competition arrived for Seroxat, the price of the antidepressant fell by 70% within two years.

The CMA’s executive director for enforcement said the GSK fine showed “our determination to take enforcement action against anti-competitive practices in sectors big and small”. But given that GSK’s actions kept competition away for 2 years, and its annual turnover (at the time) was just over £20,000 million a year, it could be argued that the company got away very lightly. The rules state that breaking competition laws can result in fines of up to 10% of annual turnover. That would amount to £4,000 million!

The approach is different in the U.S., where fines can be breathtaking. In 2012 GSK agreed to pay a fine of £1,900 million after admitting a multi-year ‘criminal scheme to hide unhelpful scientific evidence, manipulate articles in medical journals and lavish gifts on sympathetic doctors’ (The Independent, July 2nd 2012). That, too, was in relation to Seroxat (marketed as Paxil in the U.S.).

Source: The Financial Times and others

Extract B. The cost of medicines

In 2013/14 the NHS spent £14.4 billion on medicines, an increase of 7.6% on the previous year. NHS spending on medicines amounts to less than 1% of UK GDP compared with 1.5% in countries such as France and Germany.

Source: Pharmaceutical Journal Nov 18th 2014

Questions (20 marks; 25 minutes)

  1. Explain how GSK’s behaviour displays characteristics of and oligopolist. (4)

  2. Discuss two possible reasons why the UK government authorities seem quite tame in the penalties they place on companies such as GSK. (8)

  3. Discuss the possible impact of an effective patent on a drug such as Seroxat on the efficiency of the market for that drug. (8)

Key concepts for questions

Question 1 - key concepts:

  • In this case the primary issue seems to be the interdependence of firms. GSK seems to have entered an agreement to pay a number of potential rivals, in order to minimise competition. This must mean that lines of communication were clear between these ‘rivals’, i.e. they could talk to each other to come to an agreement (and transfer the cash)

  • Other characteristics such as product differentiation seem to have been unimportant in this case, as the implication of the text is that the brand name _Seroxat _mattered little

Question 2 - key concepts:

  • Extract B may give a hint. Possibly the UK authorities think that Britain is doing relatively well out of the drug companies, with a lower bill (relatively) than countries of comparable size and affluence. Perhaps they think that going easy on them in relation to fines is part of an implicit deal (which, in fact, sounds pretty suspect legally). But ultimately such a huge sum is at stake (approx. £15 billion a year) that it’s vital to get value-for-money from the drug companies.

  • Perhaps UK authorities are simply too timid in the face of multinationals. At the moment HSBC seems about to announce that it will stay in the UK having gained concessions due to its threat to move its head Office to Hong Kong. Whereas the Americans have the confidence to punish law-breaking companies severely, we seem too worried. We cut corporation tax yearly, and compromise (with a Google or a GSK) rather than punish unambiguously. We fear punishing to the point where a business’s profit is damaged – perhaps this is partly due to regulatory capture?

Question 3 - key concepts:

  • Regarding allocative efficiency, that takes place when production continues until the last unit provides a marginal consumer benefit equal to the marginal cost of producing, in other words where production represents consumer preferences. Patents would definitely get in the way of that: creating an artificial price dictated by the company, not by the market – a price at which those with real demand may not be able to afford to buy.

  • Productive efficiency takes place when output is at the lowest point on its average cost curve (i.e. where marginal cost cuts the average cost curve). A patent on a drug like Seroxat may make little difference to whether or not output is productively efficient, because the product is a necessity and therefore demand may be affected little by the high price.