3.6- Government Intervention

Question 1

What is the CMA?

Answer 1

the main competition regulator in the UK.

Question 2

What are the key aims for compeition policy?

Answer 2

To promote competition and ensure markets are efficient. They also protect consumer interests by keeping their prices low and widening consumer choice.

Question 3

What do competition authorities investigate?

Answer 3

Potential mergers between two large firms, if they would dominate the market by merging. If the merger is deemed to create a larger firm with monopoly power, likely to be prevented.

Question 4

What are the 4 gov intervention strategies to control monopolies?

Answer 4

-price regulation
-profit regulation
-quality standards
-performance targets

Question 5

Why do government intervene in the market to control monopolies?

Answer 5

In order to prevent market failure, abuse of monopoly power, loss of consumer surplus.

Question 5

Why do government intervene in the market to control monopolies?

Answer 5

In order to prevent market failure, abuse of monopoly power, loss of consumer surplus.

Question 6

What is RPI-X

Answer 6

A form of price capping. This is used for privatized industries.

Question 7

Examples of companies which are able to employ a price cap

Answer 7

OFGEM- regulates gas and electricity
OFWAT-regulates water industry
ORR-regulates rail services

Question 8

What does the value of X represent?

Answer 8

the amount in real terms that the price has to be cut by.

Question 9

Which industry is RPI+/- K ?

Answer 9

The water industry

Question 10

What does K represent?

Answer 10

How much investment the firm needs to undertake

Question 11

What are the advantages of RPI-X?

Answer 11

Firms can increase profits by cutting their costs more than X.
This encourages them to be more efficient since they have incentive to lower their costs.
Prevents firms abusing monopoly power.

Question 12

What are the costs of RPI-X?

Answer 12

It is hard to determine what the value of X should be.
Could limit how much profit a firm can make- limiting investment.

Question 13

How does profit regulation work?

Answer 13

Gov can control the profits that firms earn by ensuring they ae not excessive.

Question 14

Governments observing quality standards?

Answer 14

Governments ensure minimum standards are met. For example in gas and electricity markets, regulators ensure the elderly are treated fairly, especially in colder months.

Question 15

Why does the government set performing targets?

Answer 15

To ensure a minimum target is being met. It helps the firm to focus on increasing social welfare.

Question 16

Examples of where performing targets are set

Answer 16

-schools, the NHS

Question 17

What is the “Red Tape Challenge?”

Answer 17

Aims to simplify regulation for businesses.
It is aimed at small businesses.
Aims to make it cheaper and easier to meet environmental targets and create new jobs.

Question 18

Why are small and medium-sized enterprises important for creating a competitive market?

Answer 18

They create jobs, stimulate innovation and investment and promote a competitive environment.

Question 19

Government intervention strategies to promote competition and contestibility?

Answer 19

• Promotion of small businesses.
  -deregulation.
  -competitive tendering for government contracts.
  -privatisation

Question 20

What is deregulation?

Answer 20

The act of reducing how much an industry is regulated. It reduces government power and enhances competition

Question 21

What is privatisation?

Answer 21

Assets are transferred from the public sector to the private sector.

Question 22

Example of privatisation

Answer 22

British Airways was privatised in the UK.

Question 23

What do free market economists believe about privatisation?

Answer 23

private sector gives firms incentives to operate efficiently, which increases economic welfare. Firms operating on the free market have profit incentive.

Question 24

What is competitive tendering for governments contracts?

Answer 24

• The government provides some goods and services because they are public or merit goods.
  -The government could contract out this provision, so that private firms can operate things such as roads or hospital.
  Frees the government of maintenance, since private sector might have expertise knowledge to maintain the infrastrcuture.

Question 25

Who wins the government contract?

Answer 25

The firm which offers the lowest price and best quality of provision.

Question 26

How do governments intervene to protect suppliers and employees?

Answer 26

restrictions on monopsony power of firms.
nationalism

Question 27

How does the government restrict monopsony power?

Answer 27

Governments can ensure that farmers are receiving a fair deal.
Farmers might receive grants or subsidies to support their production.
The CMA might investigate supermarket buying power to ensure they are not abusing it.

Question 28

What is nationalisation?

Answer 28

When private sector assets are sold to the public sector.

Question 29

Example of something that was nationalised

Answer 29

The railway industry was nationalised after 1945.

Question 30

What does nationalising an industry create?

Answer 30

Natural monopolies. It is inefficient to have multiple sets of water pipes. Therefore, only one firm provides water.

Question 31

Diagram showing privatisation and nationalisation

Question 32

What is the impact of gov intervention on prices?

Answer 32

• Governments can prevent monopolies charging consumers excessive prices. Might result in loss of allocative efficiency.
  -Makes services from utility companies more affordable.

Question 33

What is the impact of gov intervention on profit?

Answer 33

Strict price caps means investment might be limited.

Question 34

What is the impact of gov intervention on efficiency?

Answer 34

Private sector more likely to operate at profit maximising level of output (MC=MR)
A public sector more likely to apporate at allocative efficient level AR=MC.
Therefore, gov intervention might lead to increase in economic efficiency.

Question 35

How does government intervention impact quality?

Answer 35

Governments ensure firms are meeting minimum targets, which ensures firms focus on increasing social welfare.

Question 36

How does government intervention impact choice?

Answer 36

If gov encourage start ups of small businesses consumer choice in the market widens since more firms are competing.

Question 37

What are the 2 limits to government intervention?

Answer 37

Regulatory capture- regulators start acting in the interests of the company, rather than in consumer interests.
Asymmetric information-Hard to determine where the price cap should be at. Hard to put a value on it.