3.6 government intervention

Question 1

who are the main regulatory bodies in the UK and outline their roles and powers

Answer 1

• the CMA - competition markets authority. their role is to promote competition and protect consumers. they investigate mergers and issue fines of £30000 for non compliance, and up to £15000 daily for continued non compliance. they punish firms for anti-competitive behaviour if found guilty.
• financial conduct authority - protect consumers, protect financial markets and promote competition
• industry regulators such as OFCOM - regulate privatised utilities and ensure there is effective competition. they also apply price caps to protect consumers
• secretary of state for business innovation and skills - oversee all competition law, and they cna overturn decisions made by the CMA or instruct the CMA to conduct an investigation

Question 2

what are the 3 main pillars of the competition act 1988

Answer 2

anti competitive agreements
cartels
abuse of a dominant position

Question 3

what is the role of the competition and markets authority

Answer 3

protect consumers interest by applying competition law, encouraging contestability and investigating reports of market abuses.

Question 4

what must be the combined market share of 2 firms who are planning to merge, before the CMA will automatically undertake an investigation

Answer 4

25% or more

Question 5

what can the CMA do if they believe a merger is against the consumers interest

Answer 5

they can prevent the merger, or they can put conditions upon it, such as requiring one of the firm to sell part of the business

Question 6

what can the CMA do if a firm has violated the competition act 1988

Answer 6

apply fines of up to 10% of global turnover for 3 years or apply fines for non-compliance with an investigation of £30000 + 15000 a day for continued non compliance

Question 7

what are the advantages and disadvantages of government intervention

Answer 7

advantages are that it helps to mitigate the negative effects of a monopoly.

disadvantages are that it can lead to government failure and sometimes there are benefits of a monopoly, which would not be realised when monopolies are regulated

Question 8

define privatisation

Answer 8

when an asset is transferred from the public sector into the private sector e..g the selling of shares in a previously state owned enterprise such as the royal mail.

Question 9

name 5 industries that have been privatised

Answer 9

water
gas
electricity 
rail
post

Question 10

define competitive tendering

Answer 10

introducing competition into the provision of public services e.g. outsourcing

Question 11

define deregulation

Answer 11

when rules and licenses are removed from an industry in order to encourage more competition into the market

Question 12

define franchising and licensing

Answer 12

allowing pre-approved private companies to provide goods and services previously only owned by the state

Question 13

identify and explain 5 advantages of privatisation

Answer 13

• improved efficiency - bc of the profit motive meaning firms keep costs under control so they can survive in the market which leads to increased productive efficiency
• increased competition - bc new firms are able to enter the market and compete with current firms giving consumers choice and improved customer service
• raises revenue for government from selling public sector asset
• widening of share ownership - selling public services has meant that more of the public have become aware of buying shares as a way of storing wealth and this is popular as it leads to an entrepreneurial culture
• removal of governmental interference - this is so that the government cannot make changes to companies at election time just to win an election, but which may not be in the long run interests of the company.

Question 14

identify and explain 4 disadvantages of privatisation

Answer 14

• natural monopolies
• > where the industry is a natural monopoly, it may not be possible to introduce competition. this means private sector monopolies wil be created which may not act in the interest of the consumers, and may not improve efficiency
• externalities
• > when a firm is nationalised they can have objectives other than profit maximising, such as improving the environment. private sector firms are more likely to ignore the negative externalities from their production
• loss of economies of scale
• > when in the public sector, firms do not have competition and so can be very large. when competition is introduced, they may lose market share, and not achieve such large economies of scale
• redistribution of wealth
• > the rich benefit more from privatisation as they have the funds to purchase the shares. could increase inequality
• job losses
• > when privatisation takes place, and the profit motive kicks in, firms will look for ways to cut costs, including making large scale redundancies, creating structural unemployment

Question 15

why do privatised monopolies need an industry regulator

Answer 15

without one they will exploit customers and make huge supernormal profits, through charging higher prices and offering a poor quality service.

Question 16

identify 5 industry regulators

Answer 16

OFCOM, OFWAT, ORR, OFSTED, OFGEM

Question 17

identify and explain the 4 main methods of intervention used by the industry regulators

Answer 17

• price regulation - price capping (RPI - X), where firms make a price cut = to the amount the government thinks they can reduce costs or increase efficiency by. and (RPI + K) where firms increase prices by RPI inflation, K representing the amount of investment needed
• profit regulation - where privatised firms are allowed to keep profit up to a certain point then they are taxed on 100% of all profit made after. this is to prevent too much supernormal profit being made from exploiting customers.
• service level agreements - where firms have to meet minimum service standards such as trains being on time, or they get fined
• performance targets - targets on aspects of perfomance such as success in reducing costs

Question 18

how does the government promote contestability in markets

Answer 18

by deregulating markets, making it easier for new firms to enter the market and take market share from incumbent firms. they can also subsidise new firms entering a market or provide more licenses so that there is space for more firms. also they can regulate the behaviour of incumbent firms so that they are not artificially creating barriers to entry that would not be in the consumers interests.

Question 19

how does the government act to restrict monopsony power on firms and employees

Answer 19

on firms, the CMA are able to investigate and fine firms who abuse monopsony power
on employees, the government prevents wages from falling below the NMW so monopsonists cannot pay their workers below this wage. there is also anti-discrimination policies which means that a monopsonist must treat all their workers fairly.

Question 20

define nationalisation

Answer 20

when there is a trasfer of ownership of assets owned by the private sector, into public ownership by the government.

Question 21

what are the arguments for and against nationalisation?

Answer 21

FOR:

• government run organisations can pursue objectives other than profit maximisation e.g. environmental goals or protecting employee welfare
• consumers not exploited with higher prices
• EOS can be achieved as there is a single large producer (nat monopoly)
• provides funds for investment into infrastructure without needing profit/return in the short run

AGAINST:

• government run organisations can be inefficient as there is no profit motive
• moral hazard as any overspends will be covered by the government
• investment funds have an opportunity cost, so may not always be available