3.6 Government Intervention Flashcards
What is the role of the Competition and Markets Authority (CMA)?
- Promote competition for the
benefit of consumers - Investigate mergers and breaches of UK and EU competition law
What are 2 reasons for the investigation of a merger?
- If the merger has a market share greater than 25%
- If the merger meets a combined turnover of £70 million or more
What are 3 problems with the CMA?
- Very few mergers are investigated each year
- CMA can suffer from regulatory capture (when a government agency operates in favour of producers rather than consumers)
- May lack the information necessary to make a decision
What are 3 methods to promote competition and contestability?
- Promotion of small businesses
- Deregulation (removal of legal barriers to entry)
- Competitive tendering
What is a benefit and 2 drawbacks of competitive tendering?
- MInimizes government costs, and increased competition provides efficiency
- Collecting bids is costly/time-consuming so not cost-effective
- Private sector may not aim to
maximise social welfare in the same way government would
What is a drawback of deregulation?
- Can lead to poor business behaviour/decisions
What are 2 ways a government can encourage small businesses?
- Can provide training and grants to new entrepreneurs
- Tax incentives or subsidies
What is competitive tendering?
When the government contracts out the
provision of a good/service to private companies (firms compete to win bid by offering competitive prices)
What are 2 forms of price regulation?
- RPI-X
- RPI+K
What is RPI-X?
A price limit which automatically accounts for RPI (retail price inflation) and for expected efficiency improvements (X)
What is RPI+K?
A price limit which automatically accounts for RPI and for additional capital spending of a firm (e.g technology, infrastructure)
What are 2 advantages of price regulation?
- Promotes firm efficiency (firms incentivised as as if they can lower costs by more than X they will enjoy increased profit)
- Prevents excessive prices
What are 2 disadvantages of price regulation?
- Difficult to know where to set X (due to rapid technology improvements, asymmetric information about firms efficiency gains/costs as they will have more info than regulator)
- Regulatory capture (when a regulator becomes dominated by the interests they regulate and not by the public interest)
What is price regulation/capping?
The government’s intervention in setting or controlling the prices of goods/services in an economy.
What are 4 government methods to control monopolies?
- Price regulation
- Profit regulation
- Quality standards
- Performance targets
What is profit regulation?
The government’s intervention in regulating or reducing the profit a firm earns (normally when a firm is earning profit not proportionate to the size of the firm/capital employed)
What is the aim of RPI-X?
To ensure firms pass on their efficiency gains onto consumers
Why do some firms require RPI+K?
Raising prices by RPI may not generate enough SNP to sustain capital investment
What are 2 advantages and 1 drawback of profit regulation?
- Encourages investment
- Prevents firms from setting high prices
- Little incentive to be efficient (a reduction in costs will not benefit firm/improve their situation)
What is the importance of quality standards?
- Monopolists will only produce high quality goods if it is the best way to maximise profits
- Quality standards ensure firms
don’t exploit their customers by offering poor quality
What is 1 benefit and 1 drawback of performance targets?
- Improves consumer satisfaction (encourages firms to enhance the quality of their good/service)
- Firms may fail to meet/resist targets (may lead to no improvements, deterrents must be strong enough to ensure targets are met)
What are performance targets?
When a regulator sets targets for firms over the price, quality, consumer choice and costs of production of their good/service
What are 3 advantages of nationalisation?
- Externalities: private firms may ignore positive externalities, government will focus on wider societal goals
- Welfare: government provision to deprived groups, basic necessities provided/accessible, reduces inequality
- Natural monopoly: government ownership of a natural monopoly prevents this exploitation of monopoly power, social welfare is maximised
What are 2 drawbacks of nationalisation?
- Reduced efficiency: X-efficiency (a firm lacks the incentive to control costs), can lead to higher prices for consumers
- Moral hazard: (incentive to increase exposure to risk), industries may encourage firms to operate inefficient or risky policies, supported industries rely on government aid
