3.6 Government Intervention Flashcards
Which 5 elements of the firm does government intervention have an impact on
Prices
Profits
Quality
Choice
Efficiency
What are the aims of competition law?
In a truly competitive market, consumers benefit from price competition, greater product development, improved product specifications and better quality of service between competitors.
Which types of behaviour does UK competition law seek to prevent?
- competitors likely to restrict competition
- non-competitors likely to restrict competition (supplier/consumer - monopsony power link)
- prohibiting abusive practices with those with high market power
- when a market doesn’t appear to be functioning effectively
- prohibiting/modifying mergers that are likely to restrict competition
- preventing the grant of a subsidy which is likely to restrict competition
State the role of the regulator in competition law
The regulator is the industry specific specialist with extensive knowledge who work alongside the CMA.
What are the penalties for infringement of UK competition law
5 year imprisonment
Unlimited fines
Directors are disqualified from any director role for 15 years
contracts will become void and unenforceable
Which actions (investigations) can the CMA take against infringement of UK competition law
Dawn raids: unannounced
Take documents, emails and electronic file
Inspect any premises which may have information
Interview anyone who could be involved
CMA reviewing mergers conditions
EVAL link to 3.1 (Business Growth): success of a merger depends on (a) whether CMA intervenes and (b) how…
There is an automatic review if:
- The merger involves a takeover of a firm with more than £70m assets
- The mergers would create a firm with more than 25% of the market
- The merger involves a firm with an existing 25% market share
If the merger is deemed to cause a ‘significant lessening of competition’ in one or markets, it will not be allowed to proceed (CMA blocks it).
Alternatively, the merger may proceed subject to conditions such as disposal of assets (eg stores of the enlarged group), a price cap for a specified period, and a commitment to a certain amount of R&D funding.
4 ways that the government can control monopolies
Price regulation
Profit regulation
Quality standards
Performance targets
Price regulation
Draw a price cap on a graph
Draw a horitontal curve under the equilibrium line.
show new/old CS/PS
PS falls CS rises
Shortage of QD-QS
Deadweight loss
All is level 4
Define profit regulation
The government can set a maximum level of profit that can be earnt by a monopolist . A profit cap is introduced to an industry where supernormal profit is regarded as excessive, or in industries where there is little competition/collusion is possible.
Draw a graph for profit regualtion
(like limit pricing)
Initially the firm is profit maximising and making a large profit
Profit cap is put in place
the business will no longer profit max and instead choose another point to operate at
lower price, increased quantity
they will still make SNP, just less
Effect of profit regulation on price
+ price is lower so CS increases
- less retained snp, less likely to be dynamically efficient
- less attractive to new entrants
Effect of profit regulation on profit
+ because profit falls, they are more liekly to be efficient, closer to AE
- less investment, less dynamic efficiency
Effect of profit regulation on choice
+ Choice increases from Q1 to Q2
- more firms exiting the market because of the decreased SNP will mean less choice
Effect of profit regulation on efficiency
+ Closer to allocatively efficiency
+ x-efficient
- less dynamic efficiency
Define Quality Standards
A monopolist may not have an incentive to produce the highest quality goods, the govt will intervene by setting quality standards.
royal mail example
Define Performance Targets
Similar to quality standards - govt sets targets for a variety of different outputs for a firm
Effect of QS/PT on choice
+ if more efficient, more quantity, choice increases, increased labour mobility
- lack of tangible evidence of improvement
Effect of QS/PT on efficiency
+ firms are forces to be more efficient (x, dynamic, allocative)
- loss making and can’t be dynamically, other inefficiencies
Effect of QS/PT on quality
+ quality improves, ARMR shift right
- reputational impacts and fines
Effect of QS/PT on price/profit
potential increases due to improved service more demand more revenue
What are the 4 ways the government promotes competition and contestability
deregulation
promotion of small businesses
competitive tendering for govt contracts
privatisation
What are the 5 ways the government encourage growth of small businesses
training
subsidies
favourable loan interest rates
favourable tax arrangements
grants to entrepeneurs
Define deregulation
The removal of statutory/government controls from markets
What is the purpose of deregulation
to create more efficiency through increased competition in markets
Royal Mails deregualtion
Costs and benefits to firms of deregulation
+ economies of scale
+ decreased BTE, more contestable, more PE/AE
+ Excessive bureaucracy is removed, FC fall
- EOS aren’t achieved
- incumbent firms are forced to invest in R+D and innovation (due to comp - is expensive)
- competition minimises profit
Costs and benefits to consumers of deregulation
+ lower prices
+ improved choice
+ improved quality
- firms may only supply in favourable markets (unlike the royal mail thing of going to all areas, consumers in some areas will suffer)
- no guarantee of high quality, TNT delivery drivers were dumping parcels as they were paid for how fast they deliver, not the quality of their service
State what competitive tendering for govt contracts is
When public bodies such as the local authorities (NHS, National Rail) allow other public or private companies to tender for certain services. Through the tendering process, the public body will grant one company the right to run these services for a fixed number of years.
What are the negative effects of competitive tendering
- They are creating an artificial monopoly as this is an artificial barrier to entry, decreasing choice, decreasing AE
- worrying as other firms are profit maximising and may not have the consumers as their best interest
- as they are being MC=MR they may not go above and beyond to reinvest and just stick to the contract
What are the positive effects of competitive tendering
+ can reach dynamic efficiency
+ quality of care due to specialisation
+ x efficiency achieved (this is due to the difference in objectives of private firms and govt/public)
What does the success of CT for govt tendering depend on
Quality standards being met
Performance targets
(success rate, waiting lists, see x amount of patients)
Define privatisation
The transfer of assets from the public sector (government) to the private sector
State some examples of privatisation
Royal Mail
British Airways
British Telecoms
What is the purpose of privatisation
increase efficiency
increase competition
increase contestability
decrease prices
Trade unions and privatisation
Less trade union power as their is no longer a monopsony
more potential for investment
(i.e. british airways can now sell shares and invest in their aircrafts)
privatisation NB
Privatisation doesn’t increase competition, the decreased barriers to entry which encourage new enterants will stimulate competition
Define Nationalisation
The process of the government buying up private assets and taking them under state control
Opposite of privatisation
State some examples of nationalisation
NHS
National Rail
National Grid
Post office
Plan a nationalisation 25 marker
find plan on word
Define monopsony and give one other condition
A monopsony is a single buyer in the market
Sellers in the market must not be able to sell their product to other firms outside the market.
Give one benefit and one disadvantage of monopsonies on consumers, suppliers and the firm
consumers:
+ lower prices increased choice and quality
- may be charged higher prices, no guarantee for low P may be given to shareholders as dividends. Also low prices may = low quality
supplier: + high (nationwide) D, ArMr shift right. also forces them to be efficient
- may need to sacrifice profits and sales max
the firm: pay less VC = ACMC shift down, increased
- attract regulatory attention fines can increase FC
How can the govt intervene to reduce monopsony power
1) appoint an independent regulator who has powers to force monopsonists to change their buying practices through a code of practice, with the threat of fines and naming & shaming for non-compliance.
2) block mergers where relevant
3) price regulation (min prices)
limitations for each method of reducing monopsony power
regulator - does the fine act as a deterrent in compared to their SNP
blocking mergers - won’t receive the benefits (DE, EoS) of a merger
min price - surplus
Define information asymmetry
Define government failure
government failure arises when the government intervention to correct a market failure doesn’t achieve it’s objectives. Instead causing an inefficiency and misallocation of scarce resources meaning the socially optimal level of output and price is not achieved
Define regulatory capture
