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Economics Unit 3 > 3.3.11 Government Intervention > Flashcards

3.3.11 Government Intervention Flashcards

1
Q

Through what methods can governments control monopolies?

A
  • Price Controls
  • Profit Controls
  • Quality Standards
  • Performance Targets
  • Breaking up Monopolies
  • Lower Entry Barriers
  • Windfall Taxes
  • Privatisation/ Nationalisation
  • Deregulation
  • Subsidies
  • Controlling mergers
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2
Q

What factors are government intervention to regulate monopolies intended to influence?

A
  • Prices
  • Profit
  • Efficiency
  • Quality
  • Choice
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3
Q

How can government limit monopolies by encouraging competition?

A
  • Promotion of Small businesses
  • Punishing anti-competitive practices
  • Deregulation
  • Competitive Tendering
  • Privatisation
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4
Q

What is the effect of the government putting price controls on Monopolies?

A

By setting the max price monopolists can charge as equal to the marginal social cost of production, to ensure allocative efficiency

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5
Q

What is the problem with price controls as a method of regulating monopolies?

A
  • Can’t know where the cost and revenue curves lie and what the allocatively efficient point of output is.
  • Limits growth because it removes the incentive from profit maximising firms
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6
Q

What is the effect of the government putting profit controls on Monopolies?

A

Intended to make firms have other objectives than profit maximisation (e.g. improving quality or efficiency)

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7
Q

What is the problem with profit controls as a method of regulating monopolies?

A
  • Requires regulators that know the costs and rates of return of certain industries
  • Causes inefficiency
  • incentive to get too much capital
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8
Q

How do profit controls cause technical inefficiency?

A

There is no incentive to minimise costs as they will always be able to earn a level of profit above that.

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9
Q

How do profit controls cause monopolists to employ too much capital?

A

If their agreed level of profit covers the costs of capital they will earn more profit the more capital they have

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10
Q

What is the intended effect of quality controls by governments on monopolists?

A

To ensure a certain level of quality that would not otherwise occur, as they are naturally profit maximising

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11
Q

What is the problem associated with quality and performance targets for monopolists?

A

They will almost always find ways to game the system and get out of fulfilling those duties

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12
Q

What is the intended effect of breaking up monopolies?

A

Increase contestibility and competition

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13
Q

What is the potential issue with breaking up monopolies?

A

May lead to welfare loss and inefficiency if it was a natural monopoly

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14
Q

What is the intended effect of lowering legal entry barriers?

A

Improve contestability and competition.

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15
Q

What is the problem of windfall taxes for controlling monopolies?

A

If used too regularly, institutions can alter their records to avoid paying the tax

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16
Q

What effect will privatising a nationalised industry?

A

Improve productive efficiency, but not break up the monopoly, just change ownership

17
Q

What effect will nationalising a privatised monopoly industry have?

A

Shift the focus to customer welfare, not profit, but not break up the monopoly.

18
Q

How can governments use subsidies to control monopolies?

A

Ensure monopolies are operating as the most allocatively efficient and socially optimal point of output

19
Q

What is the intended effect of merger policy by governments on monopolies?

A

Prevents the creation of monopolies by stopping mergers that would result in a monopoly.

20
Q

What can Monopolists do to make control by the government unnecessary?

A

Sugest self-regulation.

21
Q

What is the problem with self-regulation?

A

It is often very weak and badly enforced so it is easy for monopolists to get out of

22
Q

How does encouraging small businesses work to increase competition in a monopoly market?

A

Governments can give free training, tax benefits and grants to new entrants in order to lower barriers to entry

23
Q

How can governments protect suppliers from monopsony?

A

Passing anti-monopsony laws or appointing monospony regulators

24
Q

How can governments protect workers from exploitation by monopolies?

A

Passing laws such as max working hours and health and safety, and supporting unions

25
Q

What is a PFI?

A

A system where the private sector is hired to build and maintain infrastructure which is then leased by the government over the long term

26
Q

What are the benefits of PFI?

A
  • Increased Efficiency
  • Extra Investment
  • Delivery
  • Dynamic Efficiency
27
Q

How do PFI bring about increased efficiency?

A

The private sector is believed to be more efficient due to the profit motive to decrease costs

28
Q

Explain how extra investment is a benefit of PFI

A

Private firms use their own money to initially finance the projects so governments don’t need all of the money at once and pay the value over 30+ years

29
Q

How does PFI ensure delivery of the project?

A

Private Sector firms are not paid until the completion of the project, and are paid less if completed after a deadline

30
Q

How does PFI lead to increased dynamic efficiency?

A

Private Sector is better at innovation and good design so will be able to minimise maintenance costs

31
Q

What are the disadvantages of PFI?

A
  • Debt Costs
  • Future Costs
  • Inflexibility and Poor Value for Money
  • Risk
  • Administration
  • Addiction
32
Q

How are debt costs a downside of PFI?

A

Cost of Financing PFI is higher than that of financing government debt, in terms of interest. Would be cheaper to do it public sector

33
Q

Explain ‘inflexibility’ as a downside of PFI

A

Long term contracts, once set cannot be changed easily, which is bad if management of a project has gone wrong.

34
Q

Explain ‘poor value for money’ as a downside of PFI

A

Projects may be designed to only last as long as the length of the contract and replacement/maintenance after that point may be very costly

35
Q

Explain ‘Risk’ as a downside of PFI

A

Ultimately there is a risk that private sector might not result in a better cost benefit analysis than the public sector

36
Q

Explain ‘Administration’ as a downside of PFI

A

High spending on lawyers and advisors to assist in the bidding process is not the most efficient use of resources (Government Failure)

Economics Unit 3 (14 decks)

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