6. Government Intervention Flashcards
What do the competition and markets authority (CMA) do
Promote competition, investigate mergers, investigate breaches of uk and eu competition law and can impose financial penalties, prevent mergers and force businesses to reverse actions
How are mergers assessed
In terms of specific circumstances, will competition be lessened? Will it lead to a market share >25%?
What is the aim when two large firms are prevented from merging
To ensure that they do not exploit their customers through raising prices, dropping quality and reducing choice
Why are few mergers investigated?
The CMA can undergo regulatory capture and asymmetric information
What are the ways in which monopolies can be controlled
Price regulation
Profit regulation
Quality standards
How does price regulation work
Regulators can set prices below profit maximisation to try and increase efficiency.
What is the equation for price regulation
RPI-X where X=expected efficiency gains
RPI-X+K can be better as k=level of investment which promotes firms to be efficient
What is the problem with price regulation
It is difficult to know where to set X
What is profit regulation
The ISA have a rate of return where prices are set to cover costs and allow a ‘fair’ rate of return, which encourages investment
Problem with profit regulation
It does not reward a reduction of costs so it does not encourage efficiency
What are quality standards
It forces firms to produce to a certain quality
How can competition and contest ability be promoted
Promotion of small businesses
Deregulation
Competitive tendering
How can small businesses be promoted
Training and grants to new entrepreneurs, subsidies and tax incentives for small firms
How can deregulation encourage competition
The removal of legal barriers means more firms can compete, privatising industries also increases competition
What is competitive tendering
Where public service have private providers of their goods (equipment)
(E.g thé NHS buying trolley from private firms)
How can suppliers and employees be protected
Restricting monopsony power
Workers rights
Private & nationalisation
How can you restrict monopsony power
Through anti monopsony laws and fines for those who exploit suppliers
What are examples of workers rights
Health & safety laws, employment contracts, redundancy processes, maximum hours and the right to be in a trade union
What are the problems with worker rights
If worker rights become to strong, employers become less willing to hire
What is privatisation
The sale of govt equity in nationalised industries or other firms to private sectors
What is nationalisation
A private sector company or industry is brought under state control, to be owned and managed by the givernment
Pros of privatisation
-Greater comp
-Managers become accountable
-Reduces govt interference (greater confidence)
-allocative efficiency
-become more X-efficient
-dynamic efficiency due to incentives to reinvest
Cons of privatisation
-Abuse of monopoly power if there is a lack of comp
-Electricity, water and transport are vital so is dangerous being privately owned
-externalities and inequality
-natural monopoly loss so loss of economies of scale
Pros of nationalisation
-Social welfare is maximised
-Guaranteed minimum level of service
-Safer than private ownership
-less likely market failure from externalities
-economies of scale
