3.6 Government Intervention

Question 1

Who are the CMA?

Answer 1

Competition and Markets Authority

Question 2

What do the CMA do?

Answer 2

They work to promote competition for the benefit of consumers and investigate mergers and breaches of UK and EU competition law, enforce consumer protection law and bring criminal cases against individuals who participate
in cartels.

Question 3

how do the CMA enforce their rulings

Answer 3

They impose financial penalties, prevent mergers taking place and force
businesses to reverse actions already taken

Question 4

How are mergers assessed?

Answer 4

• in terms of the specific circumstances of each case, considering whether there will be a substantial lessening of competition
• The CMA will consider the likely competitive situation if the merger goes ahead
  compared to if it does not, and the merger will be approved if its potential benefits are greater than its cost.

Question 5

when is a merger investigated

Answer 5

A merger is investigated if it will result in market share greater than 25% or if it meets the turnover test of a combined turnover of £70 million or more.

Question 6

what are the aims of preventing mergers

Answer 6

• So they do not exploit their customers by raising price, offering poorer quality service and reducing choice.
• It can prevent firms from gaining monopoly power.

Question 7

problems with the CMA

Answer 7

the problem is that very few mergers are investigated each year. The
CMA can suffer from regulatory capture and may not have all the information necessary to make a decision.

Question 8

Why do regulators set price controls

Answer 8

to force monopolists to charge a price below profit
maximising price, using the RPI-X formula.

Question 9

What does X represent

Answer 9

The expected efficiency gains of the firms and the aim is to ensure firms pass on their efficiency gains to consumers.

Question 10

What incentive does price capping give to firms

Answer 10

to be as efficient as possible

Question 11

price capping

Answer 11

where firms are allowed to charge up to an agreed maximum price

Question 12

benefits of price capping

Answer 12

• more affordable
• not in interst of firms to expolit consumers
• keeps inflation under control

Question 13

drawbacks of price capping

Answer 13

• distorts market
• less money to reinvest
• prevents growth of firms leading to a monopoly
• loss of jobs
• prices may be put up depending on cap
• government tax revenue decrease

Question 14

why would a maximum price to be set?

Answer 14

• ensures monopolies are allocative efficient

Question 15

profit capping

Answer 15

capping the amount of supernormal profit a firm is allowed to earn

Question 16

the aim of profit caping

Answer 16

• aims to encourage investment
• prevents firms from setting high prices.

Question 17

problems with profit caping

Answer 17

• a reduction in costs will not improve the firm’s situation and so there is little incentive to be efficient.
• asymmetric information

Question 18

windfall tax

Answer 18

a once off additional tax on firm’s supernormal profit

Question 19

problems with windfall tax

Answer 19

• discourage investment
• a once off payment so no real effect
• creates uncertainity in the tax system
• LT impact on firms average costs

Question 20

why will monopolies produce high quality goods

Answer 20

Monopolists will only produce high quality goods if this is the best way to maximise
profits.

Question 21

what can the government do about quality

Answer 21

The government can introduce quality standards, which will ensure that firms
do not exploit their customers by offering poor quality.

Question 22

what is the problem with quality standards

Answer 22

It requires political will and understanding to introduce

Question 23

what is yardstick competition

Answer 23

Such as setting punctuality targets for train operating companies based on the best-performing European train operators. It is also possible to split up a service into regional sectors to compare the
performance of one region against another

Question 24

How could government set performance targets

Answer 24

They could set targets over price, quality, consumer choice and costs of production. It will help firms to improve their service and lead to gains for customers.

Question 25

Problems with performance targets

Answer 25

- The problem is that firms will resist the introduction of targets, so again it requires political will and understanding. - They will also attempt to find ways to meet targets without actually improving,

Question 26

Breaking up a monopoly

Answer 26

when the government decides that a monopoly has become too big and forces to sell of parts of its business

Question 27

Benefit of breaking up the monopolies

Answer 27

- lead to lower prices and profits - greater consumer choice

Question 28

drawbacks of breaking up a monopoly

Answer 28

- loss of economies of scale

Question 29

Subsidies

Answer 29

- This will reduce their MC and encourage them to produce where the cost to society is equal to the value society places on it

Question 30

self-regulation

Answer 30

When monopolists come under the threat of regualtion, they tend to suggest that they should regualte themselves through codes of practise.

Question 31

Why is self rgulation beneficial to government

Answer 31

it means they don't have to pass legislation and industries police themselves rather than having to pay workers to enforce regulation.

Question 32

How can the government increas competition witin small businesses

Answer 32

- the government can give training and grants to new entrepreneurs - encourage small businesses through tax incentives and subsidies

Question 33

Why do the government promote small businesses

Answer 33

It increases innovation and efficiency, since new firms are likely to provide new products and incumbent firms will no longer be able to be X-inefficient.

Question 34

What is deregulation

Answer 34

the reduction or elimination of government power in industry

Question 35

benefits of deregulation

Answer 35

- allows business to choose - can negotiate better prices - more flexible - innovation - investment - increased economic activity - improved services

Question 36

drawbacks of deregulation

Answer 36

- creates monopolies - may not protect conusmers best interest - no insight or transparency - commit fraud - creates a new system - new firms go bust

Question 37

benefits of regulators

Answer 37

- forces through better standards - evidence of very heavy fines being imposed - keeps prices under control - prevents excessive profit maximisation

Question 38

drawbacks of regulators

Answer 38

- regulatory capture - firms need supernormal profits to reinvest - inflation changes after RPI+X set

Question 39

public private partnership

Answer 39

contractors pay for the construction costs, they then rent the finished project back to the public sector

Question 40

benefits of public private partnership

Answer 40

- saves government buildings - saves government borrowing - expertise from the firm - incentive to come in on budget

Question 41

drawbacks of public private partnership

Answer 41

- profit driven - long-term costs - unnecessary improvements- lost control - government may still need to step in - taxpayers are the one paying

Question 42

How does deregulation promote competition

Answer 42

This will increase efficiency in the market by allowing greater competition as more firms can enter and conduct more activities than they could before

Question 43

How does competitive tendering promote competition

Answer 43

This helps to minimise costs for the government and ensures efficiency by allowing for competition in the market. The private sector will have more experience running the projects, so it is likely they will be better managed.

Question 44

restriction on monopsony power

Answer 44

- Monopsonists are able to exploit suppliers by reducing prices. The government can prevent these by passing anti-monopsony laws which make certain practices illegal - Fines can be put in place for those who exploit their power and minimum prices may be introduced to ensure suppliers are paid a fair amount.

Question 45

how does the governemnt prevent workers rights

Answer 45

The government protects employees through health and safety laws, employment contracts, redundancy processes, maximum hours at work and the right to be in a trade union.

Question 46

Privatisation

Answer 46

The sale of government equity in nationalised industries or other firms to private investors

Question 47

Aim of privitisation

Answer 47

The aim is to revitalise inefficient industries but can sometimes lead to higher prices and poor services.

Question 48

Nationalisation

Answer 48

when a private sector company or industry is brought under state control, to be owned and managed by the government.

Question 49

Advanatges of privitisation

Answer 49

- encourages greater competition - Managers become more accountable - reduce the public sector net cash requirement - reduces government interference - invest with greater certainty

Question 50

Disadvantages of privitisation

Answer 50

- natural monopolies it may be fairer for the government to own the firm since they won’t abuse their monopoly position. - industries are important because they effect success of other industries - externalities and inequality. - negatively affects that the PSNCR

Question 51

Advantages of nationalisation

Answer 51

- Investment is needed for the long term - better for a national monopoly - government will consider externalities. - guarentees a minimum level of service

Question 52

Disadvantages of nationalism

Answer 52

- principal-agent problem and moral hazard - X-inefficiency - influenced by government’s decisions - government may not have enough money to invest

Question 53

Natural monopoly

Answer 53

a natural monopoly exists because the cost of producing the product is lower if there is just a single producer than if there are several comepeting producers.

Question 54

Impact of government intervention on profit/price

Answer 54

- Governments are able to prevent monopolies charging excessive prices and aim to limit their profit. - They try to ensure that consumers pay fair prices, receive a good quality service and have a lot of choice through different methods of regulation and target setting. - High regulation may force some firms out of the industry, which would reduce choice.

Question 55

Impact of government intervention on efficiency

Answer 55

- They can increase efficiency in a market by increasing competition and contestability. - By regulating prices, they ensure a business keeps their costs low and so prevent X-inefficiency. - They try to increase dynamic efficiency by encouraging investment. However, if the government regulates too strongly, they can push costs up and led to inefficiency.

Question 56

Impact of government intervention on quality

Answer 56

- If the government runs a business, in theory, they should reduce prices and increase quality as they aim to benefit consumers. - lower cost due to economies of scale

Question 57

why are public sector businesses likely to be allocatively efficient

Answer 57

they aim to maximise social welfare

Question 58

why is the government x-inefficient

Answer 58

they have no incentive to be efficient due to the lack of competition. This may push up prices and reduce the quality of a good; the private sector may have expertise and knowledge which the government might not have.

Question 59

Impact of government intervention on choice

Answer 59

The government are likely to offer less choice, since there is only one company producing the good.

Question 60

When does regulatory capture happen

Answer 60

This occurs when the regulator is captured by the firm/industry they are regulating.

Question 61

Problems with regulatory capture

Answer 61

The fact that the regulator will often meet with the firm’s employees will mean they become more empathetic and able to ‘see things from their perspective’, which will remove impartiality and weakens their ability to regulate.

Question 62

why doesn't regulatory capture always work

Answer 62

- Large corporations can invest huge amounts in learning how to play the system and in gaining the support of their regulator. - It also is likely that the regulator will have worked in the sector for many years, as these people will have experience and knowledge of the industry. - they will have personal connections with those that they are regulating and this makes it difficult for them to be unbiased.

Question 63

Assymetric information as a limit

Answer 63

This is where regulatory bodies have to use information provided to them by the industries when setting price targets etc

Question 64

Why may there be assymetric information due to gov intervention

Answer 64

It is in the industry’s best interest to maximise their profits and so may provide inaccurate or limited information, meaning regulators are unable to set correct targets, prices etc.