3.6 Government Intervention

Question 1

Who helps promote competition?

Answer 1

• Competition and Markets Authority (CMA)

Question 2

What is the aim of controlling mergers?

Answer 2

• Ensure customers are not exploited (poor quality, increase prices)

Question 3

What is the problem with trying to control mergers?

Answer 3

• Government can suffer from regulatory capture

Question 4

Why do monopolies need to be controlled?

Answer 4

• They are allocatively and productively inefficient

Question 5

What 3 methods can CMA use to control monopolies?

Answer 5

• Performance targets
• Price regulations (using RPI-X system)
• Quality standards

Question 6

What 3 methods can the government use to promote compeititon?

Answer 6

• Promotion of smaller businesses (through subsidization)
• Deregulation
• Competitive tendering (Government allows private sector firms to bid for rights and services)

Question 7

What are 2 ways the Government can protect Suppliers and Employees?

Answer 7

• Restrictions on Monopsony Power
• Workers rights (e.g., safety laws, contracts)

Question 8

What is privatisation?

Answer 8

• When the government transfers ownership of a business to the private sector

Question 9

What is nationalisation?

Answer 9

• When a private sector company is bought by the government

Question 10

What type of markets are usually nationalised?

Answer 10

• Natural Monopolies
  (to maximise social welfare)

Question 11

What are 3 impacts of Government Intervention?

Answer 11

• Can prevent monopolies from exploiting (higher prices)
• Can ensure better quality and choice
• Can prevent too much market share

Question 12

How can Governments ensure efficiency? 2 ways

Answer 12

• Price regulation (can ensure costs are kept low to prevent x-inefficiency)
• Can increase dynamic efficiency (by encouraging investment)

Question 13

What is the downside to efficiency if the government regulates to strongly?

Answer 13

• Can push costs up

Question 14

What are the 2 pros and 2 cons of a government run business?

Answer 14

Pros:
- Reduces price and ensure quality

• Likely to be allocatively efficient ]

Cons:
- Will see lower economies of scale

• Can be x-inefficient (due to lack of competition, therefore lack of incentive to be efficient)

Question 15

What are 2 limits of government intervention?

Answer 15

• Regulatory capture (empathy towards producers, therefore being unable to regulate properly)
• Asymmetric information (Industries giving incorrect information to the government)