3.6 Government Intervention

Question 1

Impacts of price capping

Answer 1

May stimulate attempts to lower costs, improving efficiency
In theory it leads to an improvement in allocative efficient and consumer welfare as point of output is moved closer to social optimum (p = mc)
Lowers monopolies supernormal profits
May lead some business to leave the market reducing competition

Question 2

Reasons for government intervention in a merger

Answer 2

If merger would give new firm an overly significant market share and reduce choice for the consumers
Could lead to higher prices, reduction in quality, less choice for consumers
Lack of innovation in the market
if one dominant firm incurs supply issues who would consumers turn to for the product

Question 3

What may government do instead of outright stopping a merger

Answer 3

Maximum price in market
Allow merger on condition that some assets are sold in certain areas
Regulation bodies monitor the quality of service being produced

Question 4

Reasons for government intervention

Answer 4

Firm gains more market share
Lack of competition in the market
Allocative inefficiency
Unfair price competition

Question 5

Purpose of CMA

Answer 5

Aims to prevent large companies from exploiting consumers with tactics such as inflated prices, dynamic efficiency, innovation
Will investigate merger if they suspect a substantial lessening of competition

Question 6

Advantages of CMA activities

Answer 6

Lower prices for consumers
More choice
Firms cannot have monopoly power
More entrants into the market

Question 7

Disadvantages of CMA activities

Answer 7

CMA could block merger that would of been beneficial to the country ( innovation)
Firms lose out on profits, may effect employees

Question 8

Define merger

Answer 8

2 or more companies combining to create a new firm

Question 9

Control of monopolies - price regulation

Answer 9

• Regulators force firms to charge a price below profit maximising using RPI - x
• allowing firms to increase price by inflation minus ‘x’ being expected improvement in efficiency
• RPI - X + K ‘k’ representing the amount of profit needed to cover investment
• this system gives firms incentive to be as efficient as possible as if they can lower costs by more than ‘x’ they can enjoy higher profits
• regulatory bodies struggle to set ‘x’ because of rapid movement in technology and asymmetric information

Question 10

Control of monopolies - max pricing

Answer 10

Alternative price regulation method to RPI - x + k

• Max price could be set where p=mc ensuring monopolies are allocatively efficient
• however setting this price can be difficult as they do not know the exact allocatively efficient output.
• Max price however may limit dynamic efficiency as reduction in profits leads to lower investment

Question 11

Control of monopolies -profit regulation

Answer 11

• Used to allow cost to be covered and give a fair rate of return
• Aims to encourage investment and prevents firms from setting high prices because they know government will take any additional profit
• allows new entrants to compete fairly against bigger competitors
• However this gives incentive for firms to spend to much on capital
• also very little incentive to be efficient

Question 12

Control of monopolies - quality standards

Answer 12

Government stops firms producing poor quality goods exploiting consumers
E,g post offices + water must be supplied to all areas even if not profitable
Requires political will and understanding to do so

Question 13

Control of monopolies - performance targets

Answer 13

Punctuality targets for trains, comparing performance of 1 region to the next
Government could set targets over: price, quality, choice, cost of production
Firms may try and meet targets without actually improving
Fines must be strong enough to encourage all firms to participate

Question 14

How Does the promotion of small businesses occur

Answer 14

Government offers training and grants to new entrepreneurs and encourages small businesses through tax incentives or subsidies
Increases competition therefore reducing x inefficiency, increasing innovation

Question 15

Aim of promoting small businesses and deregulation

Answer 15

To increase competition and contestability

Question 16

Deregulation

Answer 16

Removal of legal barriers to entry such as certain licensing
This can lead to poor business behaviour
government privatising previously nationalised industries

Question 17

Competitive tendering

Answer 17

Government has to provide certain goods due to them being merit or public goods
Goods can be produced by the private sector then bought by the public sector for the final good or service to be sold to the consumer e,g NHS, equipment is made privately then bought by government
Government can contract out the provision of a good or service to private companies, this can be done by bidding which raises revenue for government. ( time consuming)
Private sector may not aim to maximise welfare in the same way that government would so industry may still need to be regulated

Question 18

Restrictions on monopolies

Answer 18

• Independent regulators to ensure monopsonist are buying fairly/ monopolies are competing fairly
• fines can be used on those who exploit there power
• minimum/max prices may be introduced to ensure supplies are paid fairly

Question 19

Workers rights

Answer 19

Health and safety, employment contracts, redundancy payments, right to join a trade union, max hours
If workers rights are too strong employees will be unwilling to take on new workers due to cost

Question 20

Privatisation

Answer 20

Sale of government equity in nationalised industries to private companies, aim is to revitalise inefficient industries

Question 21

Nationalisation

Answer 21

When a private sector company or industry is brought under state control to be managed by government

Question 22

Advantages of privatisation

Answer 22

Encourages greater competition, reducing x inefficiency ensuring low prices and higher quality
Managers become more accountable, cannot hide behind government, shareholders will complain about poor performance
Firms in surrounding industries can invest with greater certainty instead of worrying about government change
Reduces government interference which politically people like
Workers will be more motivated to work as better work= higher diverdends
In privatised industry there will be more experts offering better insights

Question 23

Disadvantages of privatisation

Answer 23

Industries such as electricity, water , transport directly effect other businesses therefore government should supply them
Competition = inequality and externalities due to profit maximising incentives instead of social welfare incentives

Investment is needed for long term improvement but shareholders in private firms do no benefit in the short run therefore a lack of investment, which may lead to poor service

Question 24

Advantages of nationalisation

Answer 24

In cases of natural monopoly it is better that monopoly is run by the state as economies of scale are too large for more than 1 firm to exploit
Government will consider externalities as they aim to maximise social welfare
Government will guarantee minimum level of service
Some people do not trust private companies with such large and important industries

Question 25

Disadvantages of nationalisation

Answer 25

Managers know any mistake will be covered by government so may take unnecessary risk or take action that otherwise they would not
X inefficiency which could cause higher prices as government may not have experts to help them in the market
Lower revenue due to social welfare incentives = lower investment
Output will be influenced by government political decisions

Question 26

Aims of government intervention

Answer 26

Government prevent monopolies from charging excessive pricing and aim to limit their profit
They try and ensure consumers pay fair prices, receive good quality service and have choice
Increase in efficiency, due to competition
Try to increase dynamic efficiency
Over regulation can push cost up and leads to inefficiency

Question 27

Limits of how regulatory bodies work

Answer 27

• If regulators work too closely with firms they begin to become more empathetic with the workers high will remove their impartiality + weaken their ability to regulate
• Any personal connections will make regulators bias
• big companies invest huge amounts to learn how to play the system + gain the support of their regulators
• this is an example of government failure

Question 28

Asymmetric information in government intervention

Answer 28

Regulatory bodies have to use the information provided by industry to work out how to regulate such as, rpi-x+k and costs
As a result government failure may occur, levels of quality standards, choice, price will be set incorrectly

Question 29

Role of the financial conduct authority

Answer 29

protecting consumers, keeping the industry stable, and promoting healthy competition between financial service providers
Being authorised by fca is essential in order to provide certain financial services