3.6.2

Question 1

The impact of gov intervention on prices

Answer 1

Charges consumers excessive prices= result in loss of allocative efficiency

This can make service from utility companies more affordable which is especially beneficial to low and fixed income households

Limiting how much a firm can increase its prices by also encourages the firm to be more efficient

If corporation tax is high, firms might pass the extra cost onto consumers, resulting in higher prices, rather than losing their own profits

Question 2

The impact of gov intervention on profit

Answer 2

If gov impose strict price caps, investment could be limited, since the amount of profit that a firm makes is restricted

Question 3

The impact of gov intervention on efficiency

Answer 3

Gov intervention might lead to an increase in economic Efficiency
Free market economists argue that by operating in a competitive environment, firms have an incentive to become efficient
They might also argue that private sector firms have to produce the goods and services that consumers want in order to keep earning profits
This might increase allocative efficiency

Question 4

The impact of gov intervention on quality

Answer 4

Governments ensure firms are meeting minimum targets, which ensures firms focus on increasing social welfare
Firms which profit maximise might compromise on quality
However, if private sector firms have the expertise and knowledge which the government might not have, then they might be able to produce goods and services of higher quality

Question 5

The impact of gov intervention on choice

Answer 5

If gov regulate monopolies and encourage the start-up and growth of SMe’s, consumer choice in the market widens, since there are more firms competing

A stringent price ceiling might force some suppliers out of the markets, which reduces the quantity supplied and narrows choice for consumers

If governments can reduce the price of a good or service, it could allow those on low and fixed incomes to access goods and services they previously could not afford

Question 6

Limits to government intervention

Answer 6

Regulatory capture
Asymmetric information

Question 7

Regulatory capture

Answer 7

There is the risk of regulatory capture
This is when regulators start acting in the interests of the company, due to impartial information, rather than in consumer interests
This information disadvantage is a problem for regulators

Question 8

Asymmetric information

Answer 8

The problem of asymmetric information can make it hard to determine what level a price cap should be imposed at
It is hard to determine government policies when intervening where there is market failure, since the extent to which market failure involves a value judgment