3.6.1 - Government Intervention Flashcards
What Is A Form Of Government Intervention To Control Mergers?
CMA.
What Is The Main Aim Of Competition Policy, Enacted By The CMA?
Ensure public interest is being protected.
Describe The CMA
(3 Points)
~ Carries out competition policy.
~ Work to promote competition and to investigate mergers.
~ Aims to prevent any single firm from gaining more than 25% market share.
How Does Competition Policy Protect Public Interest?
(5 Points)
~ Prevent excessive pricing, by monopolies.
~ Promote competition.
~ Ensure quality, standards and choice.
~ Regulate natural monopolies
~ Promote technological innovation, make sure SNP is being used in the public interest.
When Will The CMA Intervene?
(3 Points)
~ Overt collusive and cartel agreements.
~ Investigate mergers.
~ Liberalise highly concentrated markets.
What Are The Different Ways Competition Authorities / Governments Are Able To Regulate Monopolies?
(3 Points)
~ Price Regulation.
~ Quality control / standards and performance targets.
~ Profit control / regulation.
Describe ‘Price Regulation’ As A Way To Regulate Monopolies
(4 Points)
~ Price cannot be increased the next year above RPI.
~ RPI - X, price capping, by limiting price increases, to encourage efficiency gains.
~ RPI +/- K, to ensure enough profits can be made to allow for capital investment.
~ Set maximum prices, at the allocatively efficient point.
What Are The Problems With Using Price Regulation To Regulate Monopolies?
(3 Points)
~ Information issues, due to placing the level of X and K, at the right place.
~ Costly and time consuming, generating a opportunity cost.
~ Regulatory capture risks.
Describe ‘Quality Control / Standards & Performance Targets’ As A Way Do Regulate Monopolies
(3 Points)
~ Trains, only allowed to have a limited number of delays.
~ Gas and electricity markets, cannot cut supply if they face financial issues.
~ NHS, ambulances to reach calls within 8 mins or less.
What Are The Problems With Using Quality Control / Standards & Performance Targets To Regulate Monopolies?
(3 Points)
~ Unintended consequences, may lead to quality falls and short cuts.
~ ‘Gaining the system’, to make sure they reach their targets, but they may not improve.
~ Government needs to insure fines are put in place to stop this happening.
Describe ‘Profit Control / Regulation’ As A Way Do Regulate Monopolies
Rate of return regulation, covering firms costs to encourage investment into capital.
What Are The Problems With Using Profit Control / Regulation To Regulate Monopolies?
(3 Points)
~ Asymmetric information, when placing the regulation.
~ Incentive to increase costs, as they know it will be covered.
~ Incentive to over employ capital.
What Are The Different Ways Competition Authorities / Governments Are Able To Promote Competition & Contestability?
(4 Points)
~ Promotion of small businesses.
~ Competitive tendering.
~ Privatisation.
~ Deregulation.
Describe ‘Promotion Of Small Businesses’ As A Way To Promote Competition & Contestability
(3 Points)
~ Access to loans at low interest rates, to help them expand and exploit EOS.
~ If firms are using their profits to invest into R&D, they will receive reduce corporation tax rates -> R&D tax breaks.
~ Subsidies, to reduce costs of production, enabling them to compete on price with more developed firms.
Describe ‘Competitive Tendering’ As A Way To Promote Competition & Contestability
(4 Points)
~ When the government outsources specific job contracts to the private sector.
~ Private sector firms bid to win the contract, by offering the best deal, the highest quality for the lowest cost.
~ The government then chooses the firm which offers the best value for money.
~ E.g. NHS catering.
What Is Privatisation?
(3 Points)
~ When government run organisation is sold off to the private sector.
~ Idea is that private sector can run the organisation more efficiently and competitively, due to their profit motive.
~ Moving to a more allocatively efficient point of production.
What Are The Benefits Of Privatisation?
(4 Points)
~ More allocative efficiency.
~ Higher quality of goods and services.
~ Reduced x-inefficiency, firms have to drive down their costs to stay comp.
~ Efficiency gains, means DE gains.
What Are The Drawbacks Of Privatisation?
(2 Points)
~ Depends on the level of competition.
~ Loss of natural monopoly gains, due to more competition.
What Is Deregulation?
(3 Points)
~ Governments reduce legal barriers to entry, to incentivise more firms to enter a market.
~ Promoting competition.
~ Moving to a more allocatively efficient point of production.
What Are The Benefits Of Deregulation?
(4 Points)
~ More firms means more choice.
~ AE, due firms being incentivised to be more competitive.
~ XE and PE, due to firms wanting to minimise costs.
~ Higher DE, due to more competition.
What Are The Drawbacks Of Deregulation?
(2 Points)
~ Loss of natural monopoly gains.
~ Formations of oligopolies and local monopolies, causing higher prices and lower quantities.
What Are The Different Ways Competition Authorities / Governments Are Able To Protect Suppliers & Employees?
(2 Points)
~ Restrictions of monopsony power of firms.
~ Nationalisation.
What Is Nationalisation?
(3 Points)
~ Private sector transfers ownership, back to the government.
~ Is to maximise society welfare, by pricing at P = MC.
~ Giving the government total control over the firm and the market.
