3.6 Government Intervention

Question 1

Government intervention definition

Answer 1

When the gov interferes with decision making by firms and individuals through regulatory action in an attempt to overcome to market failure

Question 2

Government intervention to control mergers (CMA role)

Answer 2

Competition and Markets Authority (CMA):

• Investigate mergers that result in 25% or more market share
• Prevent uncompetitive outcomes in market
• Aims to prevent firms from exploiting customers in form of high prices, low choice, low quality standards through large market share ownership
• Can block mergers, merger approved if potential benefits greater than costs

Eval - very few mergers investigated each year, CMA suffers from regulatory capture (corruption of authority), may not have all info necessary to make decision

Question 3

Government intervention to control monopolies:

Answer 3

Profit regulation: ‘rate of return regulation’ = gov decide reasonable level of profit firm should earn given rate of return on capital employed based on comp market (encourages firm to increase capital employed) - aim to encourage investment & prevent high prices, gov may reduce profits through eg. taxation (EVAL - firms wont aim to reduce costs as profit estimate will be lower so little incentive to be efficient, regulators suffer from asymmetric info as need sufficient knowledge of industry)

Quality standards: ensure firms dont exploit customers by offering poor quality as focus on maximising profits, legislation for firms to meet min standards (post office has to deliver letters on daily basis to all areas) (EVAL: need strong gov implementation and repercussions if not met eg. fines)

Performance targets: set over price, quality, consumer choice, costs of production - helps firm improve service & benefit consumers (eg. certain amount of delays per day for train) (EVAL requires strong political presence & understanding, firms may find ways around it without acc improving)

Question 4

Government intervention to promote competition & contestibilty

Answer 4

• enhancing comp between forms through promotion of small business
• deregulation
• competitive tendering for gov contracts
• privatisation

Question 5

Government intervention to protect suppliers & employees:

Answer 5

• restrictions on monopsony power of firms
• nationalisation

Question 6

Impact of gov intervention on prices

Answer 6

F

Question 7

Impact of gov intervention on profit

Answer 7

F

Question 8

Impact of gov intervention on efficiency

Answer 8

F

Question 9

Impact of gov intervention on quality

Answer 9

Regulatory capture:

Asymmetric info:

Question 10

Impact of gov intervention on choice

Question 11

Limits to government intervention (EVAL):

Answer 11

Regulatory capture:

Asymmetric information: