3:5:2 Goverment Intervention Flashcards
Why do governments intervene in markets?
To maintain competition in markets
What are the two main Government Intervention Methods?
- Competition Policy ( enforcing competition law, which prevents abuse of market dominance and actions that prevent competitiveness)
- Regulation (introducing direct controls on firms, price caps, where increasing competition does not solve market failure problems)
What is Competition Policy?
Governments of countries seek to restore and maintain competition in the markets, to ensure efficient working of markets and improved consumer welfare.
What is the aim of Competition Policy?
Ensure that any action that prevents competition is blocked and that fair trading is enforced, e.g. Predatory pricing and collusion should be removed
What is a Merger?
The joining together of at least two firms to form one larger firm
What are the minimum conditions for an investigation into a merger?
- If the Merger results in a market share greater than 25%
- Or has a greater turnover of £70 million or more
Why may a merger be blocked?
Because the late market share may allow a firm to exhibit characteristics of a monopoly and dominate the market.
What kind of thighs can Firms do if they abuse their market dominance?
- Collusion
- Acting as a Cartel
- Deliberately preventing new entry of firms (through Predatory Pricing)
Is fixing prices illegal in the UK?
Yes
Example of price fixing?
In 2011, nine supermarkets in the UK were found to be fixing the price of milk and cheese preoducts - Tesco alone was fined £10 million
Regulation is [………] control of firms
Direct
What is the difference between Government Intervention and Competition Policy?
Government acts as a surrogate for competition by making firms cut prices, or take legal action, sell off assets.
What happens to a firm if they do not follow the government regulation?
Firms can be fined or can lose their right to operate
What is meant by Surrogate for Competition?
attempting to ensure that prices, profits and service quality are similar to what could be achieved in competitive markets.
What is Price Capping used for?
- Used to regulate several privatised utilities in the UK.
What actually is a Price Cap?
Is an upper limit set on the increase that the firms can add to their retail prices.
What does the Price Cap take into account?
- Inflation
- Possible efficiency gains or investment
What is Profit Regulation?
This method allows a firm to make a certain level of profit based on its capital stock before the remainder of its profit is taxed at 100%
What is the difference between the price capping system and Profit Regulation?
Means that there is no incentive to make efficiency gains that increase profits.
In Profit Regulation are Firms encouraged or penalised for their success?
Penalised and instead encouraged to make limited profit.
In Profit Regulation - What happens to a Firms Profit if they exceed their Profit Limit?
Spent on additional capital to increase the level of capital stock.
Profit Regulation - How do Firms cheat the system?
- They overstate the value of their capital
- Embark In wasteful spending to ensure that they can increase the Rate of Return on their investment
- In effect increasing their profits.
What is a Price Cap?
Is a form of regulation that sets a cap on the amount that certain firms can raise their prices.
What are Performance Standards and Quality Targets?
Based on improvements in the quality of service or reductions in the number of customer complaints.
How can the government regulate Performance Standards and Quality Targets ?
Supported by a system of fines, should the firm fail to meet the performance targets
Give an example of an Industry that uses Performance Standards and Quality Targets?
Punctuality of UK trains
Why do governments seek to promote the contestability in markets?
In order to give consumers the benefit of greater choice, innovation and competition.
How do Governments promote contestability in markets?
Can do this through reduction in barriers to entry - creating a perfectly Contestable Market in theory having no barriers to entry.
Promote start up businesses because these firms can establish themselves as potential challengers to existing operators.
How will firms use their position to prevent a market from becoming Contestable?
- Use Pricing Strategies
- Legal Barriers such as Patents
How do Regulators (Government) stop Firms from preventing a Contestable Market?
They can investigate into firms decisions to open up the market.
What is the process of Privatisation?
Is the process by which government transfers the ownership of a state-owned company from the public sector to the private sector.
What is Competitive Tendering?
The process by which a number of private-sector firms compete to win the right to perform a task on behalf of the government. They will charge the government for a particular task and seek to make a profit.
What are the positives to the government of Competitive Tendering?
Results in the cheapest most cost effective bid winning.
What can prevent the power of monopsonists?
- CMA
- Legislation
- Creation of Competition
How does the reduction of the power of monopsonists benefit suppliers?
Helps to protect suppliers from exploitation.
What can the government do to regulate businesses?
- Break up Firms
- Fine Firms
- Block Mergers
- Jail executives
What impact does Government Legislation have on markets?
- Increased Competition, therefore reduce prices, as well as increase quality and innovation
Government actions can result in […….]
Government Failure
What is meant by Government Failure?
The actions of the government that actually move the industry away from the socially optimal level of output that the government was trying to achieve.
Why is it sometimes difficult for the Government to Regulate Firms?
- Firms closely guard their data surrounding costs, innovations, Pricing Strategies and employment, to make it difficult for the regulator to form a complete picture of the business.
Why may there be Asymmetric Information in regulating markets?
Firms possess more information than the regulator and therefore is in a strong posture on to prevent competition.
What is Asymmetric Information?
Where one party has access to more information than another, means that the regulator is unable to fulfil its duties.
What is Competition Policy used for?
Used to prevent the abuse of market power and Prevent acts that do not allow fair competition such as a merger or an act of collusion.
What is the link between an Acquisition and Merger with the CMA?
A merger / Acquisition may be referee to the CMA to prevent large monopolies forming.
Regulation is a Form of [……….]
Direct Control
What is RPI - X?
Is a price-Control method for regulating some privatised utilities.
What is RPI + K?
Is a price-Control but K is added to allow for increases in investment.
What prevents regulators from doing their job effectively?
Asymmetric Information.
