3.6 government intervention

Question 1

price regulation- controlling monopolies. what is it?

Answer 1

monopolies raise price and restrict output compared to competitive markets, resulting in them being allocatively inefficient. created by setting a max price where P=MC e.g train fares

Question 2

price regulation- controlling monopolies. RPI - X?

Answer 2

allow prices to increase at the rate of RPI but subtract an amount reflecting the efficiency gains that the regulator believes can be achieved by the firm

Question 3

price regulation- controlling monopolies. RPI+K?

Answer 3

takes the RPI and allows the addition of K which is the additional capital spending a firm has agreed with the regulator is necessary

Question 4

price regulation- controlling monopolies. arguments for price capping?

Answer 4

prevents making of excessive profits at the expense of the consumer (curtailing monopoly power of dominant firms), increases affordability for consumers, create incentive for firms to lower costs in order to increase profits

Question 5

price regulation- controlling monopolies. arguments against price capping?

Answer 5

distorts price mechanism, creating supply issues in the LR, regulators may lack accurate information for setting price capts, reduced profits which could lead to reduced investment (dynamic inefficiency)

Question 6

profit regulation- controlling monopolies. what is it?

Answer 6

set a maximum level of profit that can be earned, taking operating costs and adding a rate of return on capital employed.

Question 7

profit regulation- controlling monopolies. problems?

Answer 7

regulators need to have a good understanding of costs and rates of return in the industry, creates little incentive to minimise costs

Question 8

quality standards- controlling monopolies?

Answer 8

where quality is an issue government can set quality standards to be met, company making decisions purely on profit maximising grounds would not provide the service

Question 9

quality standards- controlling monopolies. evaluation?

Answer 9

monopolies will try to resist or water down any quality requirements, regulators need to ensure that standards are not set so high that they are restrictive to businesses, regulators need to have a understanding of the industry to impose meaningful quality standards

Question 10

performance targets- controlling monopolies?

Answer 10

governments may set targets for price, product quality or choice

Question 11

performance targets- controlling monopolies. problems?

Answer 11

may find ways round meeting performance targets without actually making improvements

Question 12

nationalisation- controlling monopolies?

Answer 12

taking a privately owned company and put into public ownership, changes from company objectives from profit maximisation to something more customer/ society focussed BUT government companies be susceptible to x-inefficiencies less focus on keeping cost low

Question 13

break up the monopolist - controlling monopolies?

Answer 13

reduce monopoly power by forcing monopolist to sell off part of its business, competition should result in less exploitation of consumers BUT any EOS will push up costs of production

Question 14

controlling mergers- what is the CMA?

Answer 14

competition and markets authority, promotes competition for the benefit of consumers, UKs overall regulator on competition

Question 15

controlling mergers- what does it mean to remit?

Answer 15

investigate mergers, investigate abuse of market power, take action against anti-competitive behaviour, protect consumers from unfair trading practises

Question 16

international competition regulation- controlling mergers?

Answer 16

EU (european commission), US (federal trade commission)

Question 17

UK regulators- controlling mergers?

Answer 17

Ofcom- regulates TV and radio, telecoms, mobiles, postal services
Ofgem- regulates gas and energy
Ofwat- regulates water and sanitation
Office for Rail and Road- safety and fairness in rail and road
they can impose price caps

Question 18

what are examples of CMA blocking mergers?

Answer 18

Meta/Giphy - takeover could harm social media users and advertising
JD/ footasylum- merger could lead to less choice and a worse deal for customers
ASDA/ sainsbury 2019

Question 19

impact of merger regulation on choice?

Answer 19

avoids the build up of monopolies which may reduce range of choice

Question 20

impact of merger regulation on price?

Answer 20

regulation prevents exploitation of consumers by powerful firms

Question 21

impact of merger regulation on costs?

Answer 21

greater competition provides a stronger incentive to keep x-inefficiencies to a minimum

Question 22

impact of merger regulation on innovation?

Answer 22

greater competition provides a stronger incentive for firms to innovate (dynamic efficiency)

Question 23

what is encouraging the growth of small businesses?

Answer 23

government can try to increase the number of small businesses to increase competition, provide training and grants to potential new entrepreneurs, can do this through tax incentives or subsidies

Question 24

what is deregulation?

Answer 24

removing government controls in order to promote competition and improve efficiency through lower costs, fewer constraints on business can allow more flexibility, can lead to problem of private firms focussing only on profitable sections of the industry

Question 25

what is regulation?

Answer 25

can force competition to occur, particularly natural monopolies, price regulation can encourage competition if it discourages price fixing behaviour, firms have to compete more on non-price factors

Question 26

what is competitive tendering?

Answer 26

government invites bids from private sector firms and awards a contract to the firm offering the lowest price

Question 27

what is privatisation?

Answer 27

does not reduce monopoly power, but could create a greater incentive to cut costs and increase efficiency, cost reductions outweigh the extra profit that is captured than consumers may gain

Question 28

what is government intervention to protect suppliers?

Answer 28

preventing abuse of monopsony power, firms with strong buying power may be able to abuse this position and exploit suppliers

Question 29

what is the impact of monopsony power on suppliers?

Answer 29

pushing down the price they pay- harming supplier revenue, imposing additional requirements/ costs on supplier, not receiving payment on time, lack of alternative selling options

Question 30

what is the GCA?

Answer 30

groceries code adjudicator, ensures retailers treat suppliers fairly, investigates complaints from suppliers, arbitrates in disputes, can fine up to 1% of sales or imposing conditions

Question 31

government intervention to protect employees?

Answer 31

vulnerable to exploitation, legislation provides rules on health and safety, employment contracts, maximum working hours, redundancy rules and trade union rules, government could provide greater scope for trade unions to operate, greater representation for workers concerns, nationalisation can lead to greater job security

Question 32

what is regulatory capture?

Answer 32

firms may attempt to build a favourable relationship with a regulator, extreme is bribing officials, regulator is vulnerable to intimidation by firms, making decisions that will favour the firms

Question 33

asymmetric information?

Answer 33

government and regulators will have less information about firm and industry than firms themselves, feed limited government to see a worse financial position than they actually are, may cause government to be too lenient on firms