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Economics Theme 3 > 3.6.1- Government intervention > Flashcards

3.6.1- Government intervention Flashcards

1
Q

What is the name of the department that promotes competition in the UK?

A

The Competition and Markets Authority

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2
Q

What does the CMA do?

A

Promotes competition, investigates mergers, enforces consumer protection law and brings criminal cases against individuals who participate in cartels

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3
Q

When is a merger investigated?

A

If it will result in a market share of over 25% or if its large already (>£70m in assets)

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4
Q

Why should mergers be blocked?

A

-will increase prices and decrease quality due to decreased competition
-protects choice
-protects pluralism
-stops monopoly/monopsony power

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5
Q

What is pluralism?

A

Multiple views on society

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6
Q

Why should mergers happen?

A

-may lead to better R+D and innovation due to combined resources
-economies of scale
-synergy
-more efficient
-smaller firms merging can create challenge to existing dominant firm
-increased availability
-vital expansion strategy for small firms

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7
Q

What is an example of a merger taking place?

A

Tesco’s takeover of Booker’s in 2017

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8
Q

What is an example of a merger not taking place?

A

Ryan Air and Aerlingus in 2010 as they would control more than 80% of all Europe flights from Ireland

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9
Q

What is the evaluation of the CMA?

A

-difficult to detect and prove anti competitive behaviour
-can be regulatory capture
-legal action is expensive and time consuming
-asymmetric info
-CMA staff can be ineffective due to high staff turnover

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10
Q

What is regulatory capture?

A

When regulators are influenced by the interests of the firm rather than the public

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11
Q

Why do monopolies need regulation?

A

-high profits
-high prices
-low investment

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12
Q

What is an example of a monopoly with low investment?

A

BP received £23 million profit in 2022, but paid 14 times as much to shareholders in dividends than it did on low carbon activities

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13
Q

What are the types of price regulation?

A

-max price
- RPI-X
-RPI +K

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14
Q

What is RPI-X?

A

A max price is risen by inflation minus the expected efficiency gain

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15
Q

What is RPI+K?

A

A max price is risen by inflation plus the additional capital spending that the regulator insists must take place

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16
Q

What is an example of an industry that is involved in RPI+K?

A

The water industry due to burst pipes and leakages

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17
Q

What are the evaluation points of price regulation?

A

-hard to work out k/x
-asymmetric information
-gov failure if incorrect
-may be regulatory capture

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18
Q

What profit regulation is there?

A

Rate of return capping

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19
Q

What is rate of return capping?

A

Allows coverage of a fair rate of return on capital investment, but caps profit past that

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20
Q

How do you work out rate of return capping?

A

net profit/capital employed * 100

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21
Q

What is the evaluation of rate of return capping?

A

-firms wont want to maximise profit, so will spend elsewhere like being x-inefficient or increasing wages
-asymmetric information
-incentive to employ too much capital

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22
Q

Why may the government implement quality controls to control monopolies?

A

To ensure firms don’t exploit consumers with poor quality

23
Q

Why may the government implement performance targets to control monopolies?

A

To improve their service for consumers by threatening fines if they don’t comply

24
Q

What are some examples of performance targets?

A

-power cuts to be fixed within 24 hours
-5 year guarantee on repairs
-punctuality targets for trains

25
Q

What is the evaluation for performance targets?

A

-will ‘game the system’
-fines may not be strong enough

26
Q

How may train companies ‘game the system’?

A

By changing train timetables to reduce delays

27
Q

What are windfall taxes?

A

Taxes that are imposed after very high profits have been made

28
Q

What is evaluation of windfall taxes?

A

-increases prices for consumers
-tax avoidance
-under reporting profits
-less innovation

29
Q

Why may the government break up the monopoly?

A

To improve choice

30
Q

Why is it bad to break up monopolies?

A

A loss of economies of scale so prices rise

31
Q

Why may a government subsidise monopolies?

A

To allow them to produce at allocative efficiency by reducing MC

32
Q

What is the evaluation of subsidies?

A

-opportunity cost
-requires knowledge of where AE is

33
Q

Why may a monopoly self regulate?

A

To prevent stricter regulation by the government

34
Q

What are the ways the government can promote competition and contestability?

A

-promotion of small businesses
-deregulation
-competitive tendering

35
Q

How may a government promote small businesses?

A

-give training and grants to new entrepreneurs
-encourage small firms through tax incentives or subsidies

36
Q

Why do governments deregulate to promote competition?

A

To increase choice, productivity, and dynamic efficiency

37
Q

What are the disadvantages of deregulation?

A

-loss of natural monopoly (higher costs and wastage)
-poor business behaviour

38
Q

What is an example of poor behaviour after deregulation?

A

Deregulation of financial markets leading to the 2008 financial crisis

39
Q

What is competitive tendering?

A

Gov can contract out the provision of a good or service to private companies who bid for the contract by offering the lowest price they can

40
Q

Why is competitive tendering good?

A

-promotes competition
-minimises costs
-private sector have more experience running these projects

41
Q

What is bad about competitive tendering?

A

Private sector firms may cost cut by reducing quality as they don’t prioritise social welfare

42
Q

What are the ways the government intervenes to protect suppliers and employees?

A

-restrictions of monopsony power
-workers rights

43
Q

How can the government restrict monopsony power?

A

-Can introduce an independent regulator who will force them to buy fairly
-fines can be put into place and minimum prices may be introduced

44
Q

How can the government help workers rights?

A

-health and safety laws
-contracts
-max hours at work
-right to be in a trade union

45
Q

What happens if worker rights are too strong?

A

Employees will be unwilling to take on new workers due to extra cost

46
Q

What is privatisation?

A

When a government owned business is transferred to a private owned business

47
Q

What are the advantages of privatisation?

A

-encourages greater competition, which reduced X-inefficiency and lowers prices
-more innovation
-reduction in state borrowing and spending
-managers become more accountable as a poor performance means shareholders will replace them

48
Q

What are the disadvantages of privatisation?

A

-may abuse monopoly position
-some industries like electricity, water, and gas directly affect the success of other industries
-problems of externalities and inequalities

49
Q

What is nationalisation?

A

When a private sector firm is transferred to a government owned firm

50
Q

What are the advantages of nationalisation?

A

-long term investment
-for a natural monopoly, its best as it maximises social welfare
-considers externalities
-controls possibilities of monopoly power

51
Q

What are the disadvantages of nationalisation?

A

-moral hazard
-may be x-inefficient

52
Q

What is moral hazard?

A

Knows losses will be covered by the government so takes more risks

53
Q

What is an example of a nationalised service and its struggles?

A

The NHS, which suffers from a lack of funding and competition, which leads to poor quality

Economics Theme 3 (15 decks)

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