19- Government intervention

Question 1

Why governments are concerned with mergers?

Answer 1

As they may get too large and gain the ability to manipulate the market for their own benefit- damaging consumer welfare.

Question 2

Condition for mergers?

Answer 2

• Permission from Competition Markets Authority (CMA) and Office of Fair Trading- who decide whether or not allow a merger.

Question 3

How the government can reduce merger power?

Answer 3

• Restrict mergers
• Order demergers
• Competition policy
• Stopping merger with which could have too much monopoly power.

Question 4

Forms of government intervention to control monopolies?

Answer 4

• Price regulation
• Profit regulation
• Information prevision
• Nationalisation
• Quality standards
• Performance targets

Question 5

What is profit regulation?

Answer 5

Regulation authorities regulate prices set by monopolies to protect consumers from being exploited.

Its forces monopolies to use the RPI-X formula where X is equal to the expected saving that monopolies will make due to their scale of production.

Question 6

Price regulation in natural monopolies?

Answer 6

• Price caps- total costs are always falling meaning prices would be far higher if there were more than one firm in an industry.

Question 7

Examples of regulators

Answer 7

Ofcom

Ofgem

Question 8

Aim of price regulation?

Answer 8

Improving efficiency

Question 9

What is profit regulation?

Answer 9

When authorities determine a reasonable level of profit the firm should be making. If a firms profits are greater than this level, the authorities may impose a one-off tax to cut down the excess amount of profit- Windfall tax

Question 10

What can authorities do with revenue gained from profit regulation?

Answer 10

Subsidise smaller firms to make market more contestable