3.6 Government Intervention

Question 1

Why and why does the government intervene to control mergers

Answer 1

• To make sure that any mergers and takeovers are in favour of consumers and after the M&A competitiveness will remain within the market

Question 2

What is the aim of the CMA when controlling mergers ?

Answer 2

• To ensure that mergers do not lead to worse outcomes for consumers via higher prices, lower quality and reduced choice

Question 3

What may be some positive impacts of the CMA blocking a large merger

Answer 3

• Lower price for consumers
• Improved choice and quality
• Improved allocative and productive efficiency

Question 4

How can you evaluate the government attempting to control mergers ?

Answer 4

• Regulatory capture
• Asymmetric information

Question 5

Explain regulatory capture

Answer 5

• When regulatory firms start acting in favour of the firms they are regulating rather than the public due to close relations

Question 6

What are ways the government control monopolies

Answer 6

• Price regulation
• Profit regulation
• Quality standards
• Performance targets

Question 7

What is price regulation

Answer 7

• Where the body sets a price limit on an industry for a certain amount of time

Question 8

What are the two types of price regulation ?

Answer 8

RPI - X = Inflation rate - Perceived efficiency gains
RPI + K = Inflation rate + Required capital investment

Question 9

What is profit regulation

Answer 9

• Where a regulatory body sets a limit on profits earned of a company within an industry for a certain period of time

Question 10

What are two impacts of profit regulation

Answer 10

• Lower prices
• Allocative effeciency

Question 11

Evaluate profit regulation

Answer 11

• Firms may not be productive efficient as driving down costs will lead to no increase in profits
• Reduced dynamic efficiency

Question 12

What are performance targets

Answer 12

• Objectives which are set by the regulator for the firm to meet, aiming to improve customer service

Question 13

Impact of performance targets

Answer 13

• Allocative efficiency and increased consumer welfare
• Dynamic efficiency if the targets are long term

Question 14

Evaluate performance targets

Answer 14

• Reduction in productive effeciency as firms might try hit the targets
• Firms may try working around the targets. eg train companies adding time onto timetables

Question 15

What are quality standards

Answer 15

• Methods implemented by the government so that quality of goods and services for consumers are up to standard

Question 16

What are the impacts of quality control

Answer 16

• Higher allocative efficiency as higher quality products increase consumer welfare
• Dynamic effeciencty

Question 17

Evaluate quality control

Answer 17

• Conflict with productive efficiency as increasing quality of goods and service may lead to higher AC
• Only focusing on quality may lead to higher prices to fund improvements in quality

Question 18

What is enhancing competition between firms through promotion of small business

Answer 18

• Measures enforced by the government which facilitates the establishment of small business

Question 19

What are the impacts of small businesses opening

Answer 19

• Productive effeciency
• Larger amount of choice for consumer