12: External regulation of business Flashcards
What is regulation?
Any form of state interference with the operation of the free market
This could involve regulating demand, supply, price, profit, quantity, quality, entry, exit, IT, etc.
Regulation of business is needed for: (2)
- addressing market failure and externalities
- protecting public interest
Government often seeks to intervene in the case of market failure in which several ways? (6)
- providing public goods such as street lights
- providing merit goods such as education (long-term interests of society)
- controlling means of production through state ownership
- re-distributing wealth through the system via direct tax
- creating demand for output that creates jobs
- influecing supply and demand
How can governments influence supply and demand?
- price regulation (min and max prices)
- indirect taxation on expenditure
- subsidies paid by the government to suppliers
In which cases of market failure can regulation of markets be the most appropriate policy response? (4)
- Market imperfection
- Externalities
- Asymmetric information
- Equity
Applying the statue is a form of secondary / delegated legislation which is used to: (2)
- implement a primary piece of legislation appropriately
- take account of particular circumstances or factors emerging during the gradual implementation of, or during a period of primary legislation
Regulations may be put in place to: (6)
- address market failures
- increase or reduce social standing of certain groups
- see through collective desires of a significant section of society
- enhance opportunities for formation of diverse preference and belief in society
- affect development of particular preferences of society as a whole
- deal with irreversibility
Name the types of regulation relating to sustainability and climate change: (5)
- Reporting (e.g. company annual reports)
- Laws and regulations (e.g. UK Climate Change Act)
- Taxes and tariffs
- Grants
- Compliance audits
Businesses can respond to regulation in a variety of ways: (4)
- entrenchment of a particular practice (nil or no response)
- mere compliance
- full compliance
- innovation via the Porter hypothesis
What is the Porter hypothesis?
the hypothesis that strict environmental regulations trigger the discovery and introduction of cleaner technologies and environmental improvements - the innovation effect
What is meant by regulatory compliance?
Systems or departments in business which ensure that people are aware of and take steps to comply with relevant laws and regulation
List some examples of regulatory bodies in the UK
- FRC
- PRA
- FCA
- CMA (Competition and Markets Authority)
Why is the regulation of competition important?
Generally, monopolies are not in the public interest as they do not allocate resources efficiently
We wish to have an idealised corporation of the price mechanism with the notion of perfect competition.
How is competition regulated in the UK?
The Competiton Act 1998
What are the prohibited agreements in The Competition Act 1998? (2)
- anti-competitive agreements
- absue of a dominant position
What is a dominant position?
One where the business is able to behave independently of competitive pressures such as other competitors in the market
What is a cartel?
An agreement between businesses not to compete with eachother
The agreement is usually verbal and very informal
Cartel members typically agree or collude on: (8)
- prices
- output levels
- discounts
- credit terms
- technology
- which customers they will supply
- which areas they will supply
- who should win a contract (bid rigging)
Cartels or collusive behaviour in general are more likely to occur in industries or sectors because of which following factors?
- few competitors
- products have similar characteristics
- communication channels between competitors has already been established
- industry is suffering from excess capacity
- general economic recession occuring
What is the CMA?
The Competition and Markets Authority
A government body responsible for promoting effective competition between markets across the UK economy
The Competition and Markets Authority (CMA) is responsible for the following: (6)
- investigating mergers which could restrict competition
- conducting market studies in competition and consumer issues
- investigating where there may be breaches of prohibition and anti-competitive agreements
- bringing criminal proceedings against individuals who commit the cartel offence
- considering regulation appeals
- enforcing consumer protection legislation
To intervene in the level of supply in a market where there are problems of external costs and benefits such as pollution and other environmental damage, the government can use the following: (4)
- price regulations (min and max prices)
- direct or indirect tax and tariff
- subsidies to suppliers e.g. encouraging exports
- regulation by quota, standards, or fines
What is meant by insider dealing and market manipulation with people ‘in the know’?
People ‘in the know’ commit a crime under the Criminal Justice Act 1993 if they use knowledge they have as business ‘insiders’ to make a profit or avoid a loss when buying or selling shares on the back of that knowledge
Does the crime of insider dealing extend to getting someone else to deal?
YES
Which regulation involves the stock market?
The Code of Market Conduct issued by the FCA
The Code of Market Conduct provides the following examples of market abuse: (5)
- insider dealing
- manipulating transactions
- manipulating devices
- dissemination (giving out false information)
- distortion or misleading behaviour
What is the relation of influence between international corporations with regard to international legislation?
International corporations such as World Trade Organisation WTO and International Monetary Fund IMF also have extensive power to influence development of regulations
What is the relation of influence between US and EU with regard to international legislation?
The US has a huge influence over the globalisation of regulation
The EU has similar influence in continental Europe
The benefits of industrialisation have been sought by many nations via two main routes
Import substitution:
- protecting local producers
Export-led growth:
- relying on cheap labour, businesses ensure economic growth by exporting
What is protectionism?
Many legislative and other barriers to free trade exist because governments try to protect home industries against foreign competitors
Protectionism can be practiced by a government in several ways: (6)
- tariffs
- import quotas
- embargoes (bans on certain imports and exports)
- hidden subsidies for exports of domestic product
- import restrictions
- government action to devalue the nation’s currency (reduce foreign exchange value)
What are tariffs and custom duties?
taxes on imported goods
What are import quotas?
restrictions on the quantity of a product that is allowed to be imported
