3.6 Government Intervention

Question 1

What is the CMA?

Answer 1

CMA is the authority that work to promote competition for the public interest.

Question 2

What are the main aims of competition policy?

Answer 2

• Prevent excessive pricing
• Promote competition
• Ensure quality, standards and choice
• Regulate natural monopolies
• Promote technological advances; dynamic efficiency

Question 3

What are the main forms of consumer exploitation that the CMA try to prevent?

Answer 3

• Higher prices
• Less choice
• Poor quality products

Question 4

Why do CMA monitor merger activity?

Answer 4

• Aim to prevent single firm from gaining >25% market share
• To ensure level of competition is healthy

Question 5

Why do CMA monitor mergers?

Answer 5

To prevent exploitation of customers in forms of;
- Excessive pricing
- Poorer quality service
- Reduction in choice

Question 6

Why do CMA monitor monopolies?

Answer 6

CMA control monopolies that exploit their dominant position and deemed anti-competitive.

Question 7

What are the 3 different price regulations CMA can introduce to monopolies?

Answer 7

• RPI; prices allowed to increase up-to RPI
• RPI - X; prices allowed to increase up-to a level below RPI to encourage efficiency savings
• RPI+/- k; k represents level of investment

Question 8

How does price regulation for monopolies cater to public interest?

Answer 8

RPI-X/RPI+k gives firms incentive to be efficient to lower costs by more than X to enjoy increased profits. Prevents excessive pricing

Max price at allocative efficiency point

Question 9

Price regulation benefits

Answer 9

Increased efficiency
- Incentive to decrease costs to protect profits
Increased innovation
- To reduce cost of production
Prevents excessive pricing
- Consumers protected

Question 10

Eval of price regulation to monopolies

Answer 10

Calculation for level of X/k
- information gap to difficult to calculate due to rapid advancements in tech and FoPs
Cost of regulation
- Taxpayers money could be used better somewhere else
Regulatory capture
- Regulators who previously worked in industry have relationships with current owners/employees; could lead to letting them off regulation.
Exact point of AE
- Hard to set point at exact AE point due to information gaps
Reduced efficiency
- Can’t increase price
Reduced investment
- Less SNP; less investment

Question 11

How do the CMA implement profit regulation?

Answer 11

% profits on total cost

Question 12

Benefits of profit regulation

Answer 12

Protects consumers
- Prevents excessive pricing; no point
Increased innovation
- Better quality products; increased demand; capture market share

Question 13

How does quality control/performance targets regulation cater to public interest?

Answer 13

Ensure monopolies aren’t complacent to where consumers don’t get their products and consumers aren’t exploited.

Question 14

Eval of quality control/performance targets regulation.

Answer 14

Firms taking shortcuts, lower quality

e.g GPs seeing a certain amount of patients; may lead to shortcuts, rush, inaccurate diagnosis.

Hard to calculate what quality/ performance target should be met

Question 15

How does windfall/big taxes regulation cater to public interest?

Answer 15

Big taxes on monopolies cut their supernormal profits; forces them to reduce AC to maintain profits; encourages to reinvest profit; dynamic efficiency

Question 16

Eval of windfall taxes regulation

Answer 16

• Tax on profits; increase marginal costs; pass cost onto consumers; reduce Q; worsens monopoly outcomes
• Under-reporting of profits
• Promotes tax evasion/avoidance

Question 17

What are the 4 ways to promote competition and contestability?

Answer 17

• Promotion of small business
• Deregulation
• Competitive tendering
• Privatisation

Question 18

How does promotion of small business promote competition and contestability?

Answer 18

Providing subsidies to new firms to join industry; increases competition

Question 19

How does deregulation promote competition and contestability?

Answer 19

Removal of legal barriers to entry allows for firms to enter easily; increases competition

Question 19

What is dereglation?

Answer 19

Deregulation is when governments reduce legal barriers to entry.
Incentivise markets to enter; increase comp

Question 20

What is deregulation?

Answer 20

Deregulation is when government reduce legal barriers of entry
Incentivise more new entrants; promote competition/efficiency

Question 21

How does competitive tendering promote competition and contestability?

Answer 21

As a major provider of goods/services in the economy the government could choose to manufacture many products itself & this would decrease competition.
By outsourcing the supply of these products it generates more private sector activity & increases competition

Question 21

Advantages of deregulation

Answer 21

More consumer choice
- More firms; increase competition; incentive to be AE
Productive/X efficiency
- Incentive to minimise costs and maximise profits; stay ahead of competitors
Dynamic eff
- Profits made reinvested; keep up with competition

Question 22

What is privatisation?

Answer 22

Privatisation is when the state-run organisations are sold off to private sector.

Question 22

Disadvantage of deregulation

Answer 22

Loss of natural monopoly
- Increase AC, reduction in PE, wasteful duplication of resources
Formation of oligopolies and monopolies

Height of other barriers
- Legal barriers reduced but other barriers may be high

Question 23

Why may the government aim for privatisation?

Answer 23

Privatisation helps promote;
- competitive market
- efficiency

Question 24

How does privatisation promote competitiveness and efficiency?

Answer 24

Privatisation promotes competitiveness as;
- Firms able to enter the market; more competition in industry

Privatisation promotes efficiency as;
- firms have profit motive; firms become more efficient to lower costs and make profit.

Question 25

How does privatisation improve allocative efficiency?

Answer 25

Privatisation causes more competition; gives incentive to produce products consumers want and of high quality.

Question 26

How does privatisation improve X efficiency?

Answer 26

Firms need to decrease costs to keep up with competition; so firms let less waste creep in and are less complacent

Question 27

How does privatisation improve dynamic efficiency?

Answer 27

As firms get more competitive through their profit motive, they invest their profits to keep up with competition.

Question 28

Disadv of privatisation

Answer 28

Natural monopolies
- Privatised natural monopoly may mean firms abuse monopoly power

Question 29

What is nationalisation?

Answer 29

Nationalisation is the process where governments buys and runs privatised industries

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

Question 30

Adv for nationalisation

Answer 30

Greater EofS
- State-run monopoly, greater potential for EofS
More focus on service provision
- Aim for social welfare; allocative efficient benefits
Less market failure from externalities
- Government operates at social optimum level; consider social costs/benefits; produce at socially optimum Q; allo. eff up
Vehicle for macroeconomic control
- Manipulate wages to control inflation/unemployment

Question 31

Disadv for nationalisation

Answer 31

DEoS
- Public sector firm can be huge; communication/motivation/coordination issues; higher consumer price
Lack of incentive to minimise costs
- Complacency due to 0 competition; X-inefficiency; price increase
Lack of supernormal profit
- No profit motive; dynamic inefficiency; no R&D/innovation
Burden on taxpayers/deficit
- State companies expensive to run; burden on taxpayers/deficit