109/09    8 September 2009

The OFT has today published a guide for policy makers in Whitehall and beyond on how they can identify and minimise unintended long term impacts on markets when fulfilling other policy objectives.

'Government in Markets: why competition matters - a guide for policy makers', also provides an analysis of how Government intervention can affect markets for the good as well as for the bad.

When markets work well, firms only thrive by providing what consumers want in a better and more cost-effective way than their competitors. The case for competition is simply that, on average, it tends to provide better outcomes than alternative models.

However, left to themselves, markets do not always deliver the best outcomes for consumers or businesses and so government has a legitimate role in shaping them to correct failures or achieve specific policy objectives.

Today's paper argues that whatever the objective for government intervention, the effects on long term market dynamics are often hidden and only manifest themselves over time.

Government can affect markets either through direct participation - such as by creating public sector markets or by buying and supplying services - or through indirect participation in private markets via regulation, taxation or subsidy.

Recent developments in financial markets, along with the economic downturn, have led to fresh questions about the ability of markets to deliver efficiency and stability. Governments across the world have recently intervened in markets more heavily than in previous years. This, along with the challenges posed by, for example, fuel supply, environmental degradation, and food supply and security, mean that we may be seeing a fundamental turning point in societal attitudes to market mechanisms.

Launching the guide in a speech to the Regulatory Policy Institute last night, OFT Chief Executive John Fingleton said:

'The debate over the role of governments in markets is often incorrectly caricatured as state intervention on the one hand and untrammelled 'free markets' on the other.'

'In fact, government and markets are inextricably linked, and government often has a necessary and legitimate role, either as a buyer or provider of public services or through regulation, taxation, subsidy or other influence in private markets.'

'But too often we find that policy makers do not understand the effect of their actions on future market dynamics. We hope this work will help build an appreciation of the importance of maintaining open, competitive markets as well as how wider policy initiatives might inadvertently act as a long term 'dead hand' on effective markets.'

'UK consumers currently benefit hugely from hard-fought decisions over the last three decades to open markets to competition. We should not lightly roll back on that with increased domestic or international protectionism.'

One of the OFT's statutory functions is to influence Government policy to better promote competitive markets. This includes ensuring that regulation does not unnecessarily or disproportionately restrict competition, but instead achieves the best possible outcomes for consumers.

NOTES

1. Download the OFT's guide for policy makers: Government in Markets: why competition matters (pdf 591kb) and read John Fingleton's speech to the Regulatory Policy Institute.

2. One of the Office of Fair Trading's functions, under section 7 of the Enterprise Act 2002, is to provide information and advice to government on competition and consumer issues.