3.6.1: Government Intervention

Question 1

What are the four types of government intervention?

Answer 1

-Control mergers.
-Control monopolies.
-Promote competition & contestability.
-Protect suppliers & employees.

Question 2

What is the purpose of the Competition & Markets Authorities (CMA)?

Answer 2

Investigating mergers and takeovers in the UK.

Question 3

How does government intervention control mergers?

Answer 3

In the UK, mergers are assessed, considering whether there will be a substantial lessening of competition.

A merger is investigated if it results in
-a market share greater than 25%.
-a combined turnover of £70 million or more.

Question 4

What are advantages of controlling mergers?

Answer 4

-Prevent firms from gaining monopoly power.
-Stops firms from exploiting their customers.

Question 5

What are the problems with controlling mergers?

Answer 5

-Very few mergers are investigated each year.
-The CMA may not have all of the information available to make a decision.

Question 6

How does the government control monopolies?

Answer 6

-Price regulation.
-Profit regulation.
-Quality standards.
-Performance targets.

Question 7

How is price regulation used to control monopolies?

Answer 7

Regulators can set price controls to force monopolists to charge a price below profit maximising price using the RPI-X formulae.

Question 8

What is the RPI-X formulae?

Answer 8

Inflation - expected efficiency gains of the firm.

Question 9

Why is the RPI-X formulae used?

Answer 9

To ensure that firms pass on their efficiency gains onto consumers.

Question 10

What is an example of the RPI-X formulae?

Answer 10

If inflation is 5% and X is 3%, then an industry can raise prices on average by 2% a year.

Question 11

What is an advantage with price regulation?

Answer 11

It gives an incentive for firms to be as efficient as possible, as if they can lower costs by more than X, they will enjoy increased profits.

Question 12

What is a problem with price regulation?

Answer 12

It is difficult to determine where to set X.

Question 13

How is profit regulation used to control monopolies?

Answer 13

In the USA, ‘rate of return’ regulation is used: prices are set for firms to earn a ‘fair’ rate of return on capital invested.

Question 14

What is an advantage of profit regulation?

Answer 14

-Encourages investment and prevents firms from setting high prices.

Question 15

What is a problem with profit regulation?

Answer 15

It gives firms an incentive to employ too much capital in order to increase their profits.

Question 16

How are quality standards used to control monopolies?

Answer 16

The government can introduce quality standards, which will ensure that firms do not exploit their customers by offering poor quality goods.

Question 17

What is an advantage of quality standards?

Answer 17

-Increases consumer welfare.

Question 18

What is a problem with quality standards?

Answer 18

-It requires political will and understanding to introduce.

Question 19

How are performance targets used to control monopolies?

Answer 19

They could set targets over price, quality and costs of production to help firms improve their service and lead to gains for customers.

Question 20

What is an advantage of performance targets?

Answer 20

-Encourages firms to be efficient.

Question 21

What are the problems with performance targets?

Answer 21

-Firms will resist the introduction of targets.
-The government needs to ensure that sanctions are strong enough.

Question 22

How does the government promote competition and contestability?

Answer 22

-Promoting small businesses.
-Deregulation.
-Competitive tendering (for government contracts).
-Privatisation.

Question 23

How is promoting small businesses promoting competition and contestability?

Answer 23

The government can encourage small businesses through tax incentives and subsidies.

Question 24

What is an advantage of promoting small businesses?

Answer 24

-Increases innovation and efficiency, since new firms are likely to provide new products, and existing firms will no longer be able to be x-inefficient.

Question 25

How is deregulation promoting competition and contestability?

Answer 25

Legal barriers of removal in a previously protected market allow private enterprises to compete.

Question 26

What is an advantage of deregulation?

Answer 26

-Increases efficiency in the market by allowing more firms to enter the market (allowing greater competition).

Question 27

What are problems with deregulation?

Answer 27

-Licenses for specific industries are necessary to ensure standards are upheld (e.g. airline industry).
-Some argue that deregulation of financial markets contribute to the 2008 Financial Crisis.

Question 28

How is competitive tendering (for government contracts) promoting competition and contestability?

Answer 28

Goods (such as NHS sheets) are produced by the private sector, and then are bought by the public sector through the Private Finance Institute (PFI).

Question 29

What is an advantage of competition tendering (for government contracts)?

Answer 29

-Minimises government costs and ensures efficiency by allowing for competition in the market.

Question 30

What are problems with competitive tendering (for government contracts)?

Answer 30

-The process of collecting bids is costly and time-consuming.
-The private may not aim to maximise social welfare, and could use cost-cutting methods that reduce quality.

Question 31

How is privatisation promoting competition and contestability?

Answer 31

Government equity in nationalised industries are sold to private investors (e.g. Royal Mail in 2016).

Question 32

What are advantages for privatisation?

Answer 32

-Encourages greater competition, and firms realise that they need to be competitive.
-Managers will be held more accountable for their performance.

Question 33

What are problems for privatisation?

Answer 33

-It is fairer for governments to own natural monopolies.
-Problems over externalities and inequality.

Question 34

How does the government protect suppliers and employees?

Answer 34

-Restrictions on monopsony power.
-Nationalisation.

Question 35

How are restrictions on monopoly power protecting suppliers and employees?

Answer 35

the government can impose anti-monopsony laws and place fines for those who expose their power.

Question 36

How is nationalisation protecting suppliers and employees?

Answer 36

A private sector company/industry is bought under state control.

Question 37

What are advantages for nationalisation?

Answer 37

-The government will guarantee investment.
-It is better for natural monopolies to be state run as they aim to maximise social welfare.

Question 38

What are problems for nationalisation?

Answer 38

-Could result in x-inefficiency.