3.6.1 Government Intervention

Question 1

Who are the main regulatory bodies in the UK and outline their powers and roles?

Answer 1

CMA - The UK’s primary competition and consumer authority. It is an independent non-ministerial government department. It investigates mergers. Its role is to protect consumer interests.

It can fine up to £30,000 for non-compliance with investigation.

Question 2

What are the main 3 pillars of the Competition Act 1988?

Answer 2

• Anti-competitive agreements
• Cartels
• Abuse of a dominant position

Question 3

What must be the combined market share of two firms who are planning to merge, before the CMA will automatically undertake an investigation?

Answer 3

25% or more

Question 4

What can the CMA do if they believe a merger is against the consumers’ interest?

Answer 4

They can prevent mergers, or they can put conditions upon it, such as requiring one of the firms to sell a part of the business.

Question 5

What can the CMA do if a firm has violated the Competition Act 1988?

Answer 5

• Apply fines of up to 10% of global turnover for 3 years.

- Fine up to £30,000 for non-compliance

Question 6

What are the pros and ons of government intervention?

Answer 6

Advantages are that it helps to mitigate the negative effects of monopoly

Disadvantages are that it can lead to government failure and sometimes there are benefits of a monopoly, which would not be realised when monopolies are regulated

Question 7

Define privatisation

Answer 7

When an asset is transferred from the public sector into the private sector e.g. the selling of shares in previously owned enterprise such as the Royal Mail.

Question 8

Name 5 industries that have been privatised

Answer 8

• Water
• Gas
• Electricity
• Rail
• Post

Question 9

Define competitive tendering

Answer 9

Introducing competition into the provision of public services e.g. outsourcing

Question 10

Define deregulation

Answer 10

Removal of restrictions on the provision of a good/service

Question 11

Define franchising and licensing

Answer 11

Allowing pre-approved private companies to provide goods and services previously only provided by the state

Question 12

Identify the 5 advantages of privatisation

Answer 12

• Improved efficiency
• Increased competition
• Raises revenue for the government from the sale of the public sector asset
• Widening of share ownership
• Removal of government interference

Question 13

Identify and explain 4 disadvantages of privatisation

Answer 13

• Natural monopolies
• Externalities
• Loss of economies of scale
• Redistribution of wealth
• Job losses

Question 14

Why do privatised monopolies need an industry regulator?

Answer 14

This is because without one they will exploit consumers and make huge super-normal profits, through charging higher prices, and offering a poor quality service

Question 15

Identify 4 industry regulators

Answer 15

• OFCOM
• OFWAT
• ORR
• OFGEM

Question 16

Identify the 4 main methods of intervention used by the industry regulators

Answer 16

• RPI - X
• RPI + K
• Profit regulation
• Service Level Agreements

Question 17

How does the government promote contestability in markets?

Answer 17

By deregulating markets, this makes it easier for a new firm to enter the market and take market share from the incumbent firm. They can also subsidise new firms from entering a market or provide more licenses so that there is space for more firms.

Question 18

How does the government act to restrict monopsony power on firms and employees?

Answer 18

• On firms, the CMA are able to investigate and fine firms who abuse monopsony power.
• On employees, the government prevents wages from falling below the NMW, this means that monopsonists cannot pay their workers below this amount. There is also anti-discrimination policy which means that a monopsonist must treat all their workers fairly.

Question 19

Define nationalisation

Answer 19

When there is a transfer of ownership by the government.