Question

Question 2 – Government Intervention as Anti-Trust Laws

Sometimes governments intervene with the markets; the reason for the intervention might be a concern about allocative efficiency, or production inefficiency or some “fairness” issue.

Your task here is to explain the motivation for government instituting laws against forming cartels (price fixing). Analyze the situation before and after government intervention, and then conclude by referring to the possible reason for intervention.

Answer 1

QUESTION 2

                                    A Cartel refers to an organization of independent market participants who creates a formal agreement to regulate the supply in order to regulate or manipulate the pricing in an economy. Thus, they represent a group of business or countries who avoids competition in the market and work together as a single entity. The various strategies adopted by these cartels are reduction of supply, price fixing, collusive bidding and market carving. With increased prices and lack of transparency, the effect of these illegal groups is considered to be harmful for the various consumers in the market. Considering the above features of cartel, various government interventions are necessary to control them. Let us first discuss the possible situations before and after government intervention in an economy where a Cartel is functioning before concluding on the necessity of a government intervention.

Market situations before government intervention

· Increased pricing, restricted supply and less transparency in market behaviour

· Some of these Cartels are found to influence illegal trade like drug trade which is harmful for the society as a whole.

· Due to their effects, new entrants in to the market are being discouraged

· Since competition doesn’t happen between these groups it would lead to a monopoly market system affecting other fellow suppliers in the market and thus leading to an unstable economy.

· Lack of competition leads to less variants in the market and reduced innovation

· International Cartels doesn’t follow the business cycle and hence their failure may lead to global recessionary effects as it happened with OPEC in 1970’s

Market situations after government intervention

· With proper intervention in price fixations, it could result in a more competitive market structure.

· More new entrants could be encouraged by this competitive market structure which could lead to more variants in the market and thus lead to more innovations.

· The consumers in the market would have access to a more equitable market with regulated pricing mechanisms which could lead to improved consumption patterns in the society.

· It could avoid the possible global effects and hence save an economy from recession

                                        With reference to the above factors, it can be seen that government interventions are always necessary in a market structure so as to maintain an equitable competitive market system which could lead to a stable market and an economy with higher consumption and more satisfied customers. Once the situations before government interventions are analysed, it could become clear as to why the government interventions are necessary in such a market in particular.