3.6 government intervention Flashcards
Why should the government intervene to control monopolies?
Profit maximising monopolies earn abnormal profit, reducing consumer surplus and turning it into increased producer surplus.
Producing below the allocatively efficient level of output also produces a deadweight welfare loss.
What are some methods of government intervention to control monopolies?
Price regulation, profit regulation, quantity standards, performance targets, controlling mergers.
What is the role of the Competition and Markets Authority (CMA)?
They promote competition for the benefit of consumers, investigate mergers and breaches of competition law, enforce consumer protection law, and bring criminal cases against individuals in cartels.
They can impose financial penalties, prevent mergers, and force businesses to reverse actions.
At what output levels is a monopoly firm profit maximising, productively efficient, and allocatively efficient?
Profit maximising output: MC = MR, Productively efficient: MC = AC, Allocatively efficient: MC = AR.
What is price regulation in the context of monopolies?
By implementing a price ceiling, the maximum price a monopolist can charge is set to the marginal social cost of production, achieving allocative efficiency.
What is the evaluation of maximum prices set by the government?
The gain to consumers is less than the loss to producers, resulting in deadweight loss.
What formulas can be used to set price controls for monopolists?
RPI - X and RPI - X + K.
What does RPI - X represent?
The price automatically adjusts for the previous year’s retail price inflation (RPI) and for expected efficiency improvements (X).
What does RPI - X + K represent?
K represents the level of investment, incentivizing firms to be efficient and ensuring gains are passed onto consumers.
What are the limitations of the ‘RPI - X’ formula?
Difficult to set X due to rapid technology improvement and firms may provide misleading information, leading to sudden price falls or rebates.
What is profit regulation?
Government sets a profit level for monopolists to ensure they make no more profit than in a perfectly competitive industry.
What is the aim of profit regulation?
Encourages investment and prevents firms from setting high prices.
What are the limitations of profit regulation?
Incentives to employ too much capital, little motivation to minimize costs, and asymmetric information for regulators.
What are quality standards in government intervention?
Governments can set quality standards where quality is an issue.
What are the limitations of quality standards?
Monopolies may resist by suggesting self-regulation, and political will is needed to introduce these policies.
What are performance targets?
Governments set targets for various outputs from a firm, such as price, quality, consumer choice, and production costs.
What are the limitations of performance targets?
Monopolists may find ways to meet targets without actual improvement, and performance data may be inaccurate due to asymmetric information.
What is the role of the CMA in controlling mergers?
They investigate large mergers that reduce competition and can prevent them or require asset sales to maintain competition.
What are some methods of government intervention to promote competition?
Deregulation, competitive tendering for government contracts, promoting small businesses, and privatization.
What is deregulation?
Reducing or removing government-imposed restrictions to promote competition, efficiency, and innovation.
What are examples of deregulation?
UK postal services market deregulated in 2006 and energy market deregulation.
What are arguments favoring deregulation?
Increased competition, innovation, economic growth, and consumer choice.
What are arguments against deregulation?
Reduced safety and quality, increased inequality, reduced consumer protection, and environmental costs.
What is competitive tendering?
When projects are put out to tender for private sector firms to bid for the right to provide services.
