3.6.1: Government Intervention Flashcards
What are the four types of government intervention?
-Control mergers.
-Control monopolies.
-Promote competition & contestability.
-Protect suppliers & employees.
What is the purpose of the Competition & Markets Authorities (CMA)?
Investigating mergers and takeovers in the UK.
How does government intervention control mergers?
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.
What are advantages of controlling mergers?
-Prevent firms from gaining monopoly power.
-Stops firms from exploiting their customers.
What are the problems with controlling mergers?
-Very few mergers are investigated each year.
-The CMA may not have all of the information available to make a decision.
How does the government control monopolies?
-Price regulation.
-Profit regulation.
-Quality standards.
-Performance targets.
How is price regulation used to control monopolies?
Regulators can set price controls to force monopolists to charge a price below profit maximising price using the RPI-X formulae.
What is the RPI-X formulae?
Inflation - expected efficiency gains of the firm.
Why is the RPI-X formulae used?
To ensure that firms pass on their efficiency gains onto consumers.
What is an example of the RPI-X formulae?
If inflation is 5% and X is 3%, then an industry can raise prices on average by 2% a year.
What is an advantage with price regulation?
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.
What is a problem with price regulation?
It is difficult to determine where to set X.
How is profit regulation used to control monopolies?
In the USA, ‘rate of return’ regulation is used: prices are set for firms to earn a ‘fair’ rate of return on capital invested.
What is an advantage of profit regulation?
-Encourages investment and prevents firms from setting high prices.
What is a problem with profit regulation?
It gives firms an incentive to employ too much capital in order to increase their profits.
How are quality standards used to control monopolies?
The government can introduce quality standards, which will ensure that firms do not exploit their customers by offering poor quality goods.
What is an advantage of quality standards?
-Increases consumer welfare.
What is a problem with quality standards?
-It requires political will and understanding to introduce.
How are performance targets used to control monopolies?
They could set targets over price, quality and costs of production to help firms improve their service and lead to gains for customers.
What is an advantage of performance targets?
-Encourages firms to be efficient.
What are the problems with performance targets?
-Firms will resist the introduction of targets.
-The government needs to ensure that sanctions are strong enough.
How does the government promote competition and contestability?
-Promoting small businesses.
-Deregulation.
-Competitive tendering (for government contracts).
-Privatisation.
How is promoting small businesses promoting competition and contestability?
The government can encourage small businesses through tax incentives and subsidies.
What is an advantage of promoting small businesses?
-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.
