3.6 - Government Intervention

Question 1

What is the CMA?

Answer 1

Competition and Markets Authority, they promote competition for the benefit of consumers and investigate legal breaches

Question 2

What is ‘surrogate competition’?

Answer 2

if there is no competition, the CMA will create a sense of it

Question 3

Controlling mergers

Answer 3

In the UK, mergers are investigated if they will lessen competition by becoming a monopoly (CR1>25%) - higher prices and less choice. However, the CMA suffers from regulatory capture and asymmetric information

Question 4

Controlling monopolies

Answer 4

they might exploit consumers, be X-inefficient and offer high prices and less choice

Question 5

Methods to control mergers/monopolies

Answer 5

• price regulation
• profit regulation
• quality standards
• performance targets

Question 6

Methods to promote competition and contestability

Answer 6

• promotion of small businesses
• deregulation
• competitive tendering

Question 7

protecting suppliers and employees

Answer 7

• restrictions on monopsony power
• privatisation and nationalisation
• workers rights
• natural monopoly

Question 8

Privatisation

Answer 8

sale of governments assets to private investors

Question 9

Advantages of privatisation

Answer 9

• encourages increased competition and efficiency
• lower prices, higher quality
• managers held more accountable
• In LR and SR it reduces public sector net cash requirement (PSNCR) and raises revenue
  decreased government intervention
• workers will be more hardworking - rewards

Question 10

Privatisation disadvantages

Answer 10

• natural monopolies are better under government control
• key industries should be state-run
• externalities and inequality
• negatively affects public sector net cash requirement (PSNCR) - gov no longer gets firms profit

Question 11

Nationalisation

Answer 11

Private sector company is bought under state control, owned and managed by government

Question 12

Nationalisation advantages

Answer 12

• private sector only invests in SR, investment is needed in LR - state-run
• natural monopolies better to be under government control
• gov considers externalities
• minimum level of service to low income earners
• key strategic industries

Question 13

Nationalisation disadvantages

Answer 13

• suffer from principal-agent problem and moral hazard
• X-inefficient
• will become a monopoly, bad for consumers
• influenced by government decisions, who might not have enough money to invest
• post WW2 - increased nationalisation

Question 14

Government intervention impacts (AN)

Answer 14

• governments able to prevent monopolies and limit their profits. Ensure consumers pay fair prices, get quality services and more choice. High regulations could force firms out -> less choice
• they can increase efficiency by increasing competition and contestability. Regulating prices -> costs low -> prevent X-inefficiency. However, too much regulation will increase AC and inefficiency
• if a government runs a business, they should reduce prices and increase quality and benefit consumers. they should be allocatively efficient in the public sector and maximise social welfare. However, they might have no incentive to be efficient (no compensation)
• governments intervention tends to be limited because of political power of large firms and industries, who can lobby the government and set up pressure groups

Question 15

Government intervention limits (EV)

Answer 15

• regulatory capture
• asymmetric information