3.6.2 Impact of Government regulation

Question 1

What does Government regulation aim to change

Answer 1

• Prices
• Profit
• Efficiency
• Quality
• Choice

Question 2

How can the Government control price

Answer 2

prevent monopolies charging excessive prices and aim to limit their profit

Intervention to promote contestability should decrease price

Minimum price/wage to control monopsony power

Question 3

How may the Government promote efficiency

Answer 3

Performance targets for Monopolies

Intervention to promote competition (should also limit profits as moving away from profit maximising point)

Particularly privitisation

Question 4

How may the Government promote quality and choice

Answer 4

promotion of small business - increased competition, competing on price and non-price

promote competition and contestability - more need for dynamic efficiency

Quality standards for monopolies

restrictions on monopsony power of firms - suppliers can have better quality goods

Question 5

Problems with Government regulation which is too strict

Answer 5

• High regulation may force some firms out of the industry, which would reduce choice
• if the government regulates too strongly, they can push costs up and led to inefficiency

Question 6

What is the problem with state-run services

Answer 6

Government may suffer from X-inefficiency as they have no incentive to be efficient due to the lack of competition

This may push up prices and reduce the quality of a goods

private sector may have expertise and knowledge which the government might not have

Question 7

Why can Government intervention be limited as a whole

Answer 7

Political power of large firms and industries as a whole

They are able to lobby the government and set up pressure groups

Question 8

What are the two limitations of Government intervention

Answer 8

• regulatory capture
• asymmetric information

Question 9

What is regulatory capture

Answer 9

• regulator will often meet with the firm’s employees will mean they become more empathetic and able to ‘see things from their perspective’, which will remove impartiality and weakens their ability to regulate
• Large corporations can invest huge amounts in learning how to play the system and in gaining the support of their regulator
• work in the industry gaining personal connections with those that they are regulating and this makes it difficult for them to be unbiased
• an example of government failure

Question 10

What is asymmetric information

Answer 10

• regulatory bodies have to use information provided to them by the industries
• It is in the industry’s best interest to maximise their profits and so may provide inaccurate or limited information, meaning regulators are unable to set correct targets
• government failure may occur if target is not set properly
• government will be unable to regulate the companies accurately