HookThames Water, and how a regulator can fail
Thames Water serves 15 million people. It is the UK's largest water utility, privatised by the Thatcher government in 1989, and regulated by Ofwat under the RPI–X (later CPIH–X) price-cap formula. From 1989 to 2024, Thames Water paid out roughly £7bn in dividends to shareholders while accumulating £19bn in debt and reporting tens of thousands of sewage discharges into UK rivers and beaches.
The market failed: regulated monopolies have no incentive to invest beyond what the regulator forces, and every incentive to extract dividends. But the regulator also failed: Ofwat approved the dividend payouts, signed off on the borrowing, and missed the under-investment in capital infrastructure for two decades. The Edexcel B point is sharper than "markets fail and governments fix them". Sometimes governments fail at fixing markets, and the right intervention is to fix the regulator, not the firm.
ModelIntervention toolkit, and its limits
Government tools fall into a few categories: direct provision (NHS, state schools), regulation (Ofcom, Ofwat, Ofgem — rules that govern behaviour without directly setting prices), price controls (price caps, minimum prices, RPI–X), taxes and subsidies (Sugar Tax, EV grants), information provision (calorie labels, energy ratings), and nationalisation (full public ownership).
Each carries a risk of government failure: regulatory capture (the regulator starts thinking like the industry), unintended consequences (rent control reducing housing supply), information asymmetries on the regulator's side (Ofwat couldn't verify Thames Water's capex claims), political short-termism (governments under-investing in things that pay off after the next election), and distributional unfairness (interventions whose costs fall on different people than their benefits).
ExamWhat examiners want
Always assess intervention against two baselines: the market failure it's trying to correct (does it work?) and the new failure it might create (does it cost more than it solves?). "Better than the market" isn't the same as "good".
The evaluation move is to name the specific government-failure risk for the case. Sugar Tax: regressive, narrow base. Rent control: supply contraction. NLW: bite-dependent unemployment. Each one has a structural critique that an A* essay will engage with.