CH14 QB External regulation of business Flashcards
The government has intervened to impose a limit on businesses’ carbon emissions. This is
an example of regulation designed to address market failure caused by:
A asymmetric information
B equity
C market imperfection
D externalities
D An externality is an adverse social consequence which the private producer has no
incentive to minimise.
The government has passed regulations to change how car hire companies check whether
hirers are licensed to drive in the UK. Speedy Hire plc is a major player in the UK car hire
business. In anticipation of the new regulations the company implemented procedures
which exceeded the requirements of the regulations. Speedy Hire plc’s response to the new
regulations was:
A innovation
B entrenchment
C mere compliance
D full compliance
A Innovation in this context is where regulation serves to trigger the discovery and
introduction of new procedures and technologies – the ‘innovation effect’, as a basis
for competitive advantage in an industry.
Ferndale plc is a multinational company. It has been charged with collusive behaviour in its
UK operations. If found guilty, the company could, amongst other sanctions, receive a fine
of:
A up to 10% of annual worldwide revenues
B up to 10% of annual UK revenues
C up to 20% of annual worldwide revenues
D up to 20% of annual UK revenues
A Collusion can lead to a fine of up to 10% of annual worldwide revenues.
The government may place an additional tax on cigarettes to raise revenue for healthcare
spending. The demand for cigarettes is price inelastic.
Which of the following statements is true?
A The tax on cigarettes may not raise as much additional revenue as anticipated because
the demand for cigarettes is likely to become more elastic over time.
B The tax will not raise much additional revenue in the short term or the long term
because demand is price inelastic.
C No additional tax revenue will be raised because sellers of cigarettes will lower their
price by the amount of the tax so the price of cigarettes to consumers will not change.
D This will raise additional revenue in the short term and the long term because there are
no substitutes for cigarettes. LO 6
A The tax on cigarettes may not raise as much revenue as anticipated in the years to
come because the demand for cigarettes is likely to become more elastic over time.
Price elasticity nearly always increases over time and will limit an additional tax
revenue. People can change their behaviour given enough time.
Government intervention in a market economy can lead to an increase in economic welfare if:
A it sets a good’s maximum price above its equilibrium price
B the market mechanism has failed to allow for externalities
C it sets a good’s minimum price above its equilibrium price
D the demand for inferior goods rises as incomes increase
B Government intervention in a market economy can lead to an increase in economic
welfare if the market mechanism has failed to allow for externalities. The government
setting a minimum or maximum price above the equilibrium price would be ineffective.
Demand for inferior goods falls as incomes rise.
The Fenno product is manufactured in the UK but is also imported into the UK from France.
The UK government has recently decided to apply an import quota on imports of the
product from France. The quota is below the current level of imports. This action will have
the effect of:
A only French suppliers suffering a lower price
B both UK and French suppliers suffering a lower price
C only UK suppliers enjoying a higher price
D both UK and French suppliers enjoying a higher price
D Restricting supply (via quota) will cause the price to rise. SAMPLE PAPER
Anti-monopoly legislation is an example of government intervention to address market failure caused by: A market imperfection B externality C asymmetric information D inequity
A Monopoly is the opposite of perfect competition and is, therefore, a market
imperfection.
Competition legislation prohibits conduct that damages competition, including abuse by a
business of its dominant position. Which three of the following are types of conduct that will
be considered as an abuse if the business is in a dominant position?
A Imposing transfer pricing
B Limiting production markets or technical developments to the prejudice of consumers
C Applying different trading conditions to equivalent transactions, thereby placing
certain parties at a competitive disadvantage
D Attaching unrelated supplementary conditions to contracts
E Providing public goods on behalf of the government
B,C,D
Imposing unfair purchase or selling prices would be considered as an abuse where the
business is in a dominant position, but transfer pricing (A) refers to the pricing of goods
and services within a multi-divisional organisation, particularly in regard to crossborder transactions.
In which of the following circumstances would a cartel be most likely to operate?
A A market with a undifferentiated product and a large number of producers
B A market with differentiated products and few producers
C A market with a large number of producers and where demand for the product is
inelastic
D A market with few producers and an undifferentiated product
D A cartel is most likely where there are few producers in the market, each of them
producing a similar product.
The benefit of anti-monopoly enforcement is that:
A it encourages firms to engage in research, which leads to new products being
produced
B it deters firms from engaging in collusion, price-fixing and deceptive advertising
C it forces firms to produce efficiently
D the revenue from fines can be used for socially worthwhile causes
B The main effect of anti-monopoly enforcement is deterrence – there is little innovation
effect (A).
Anti-monopoly laws are based on the proposition that the best way to achieve efficiency and avoid excessive prices is through: A regulation B increased competition C public ownership D oligopoly
B Tending towards a perfect market through increased competition should lead to
allocative efficiency and lower prices.
The following statements have been made about anti-monopoly legislation and market
regulation.
Statement (1) Anti-monopoly legislation compensates for lack of competition, and market
regulation promotes competition.
Statement (2) Anti-monopoly legislation promotes competition and market regulation
compensates for lack of competition.
Statement (3) Anti-monopoly legislation and market regulation promote competition
Are these statements true or false?
Statement (1) Statement (2) Statement (3)
A True False True
B True False False
C False True True
D False True False
D The first and third statements are false, but the second statement is true – antimonopoly legislation promotes competition but, where competition is not possible,
market regulation is used to compensate for the lack of competition.
Measures taken by government to redistribute wealth are a form of intervention aimed at addressing problems concerned with: A asymmetric information B market imperfection C lack of equity D externalities
C Redistribution of wealth is an attempt to address lack of equity.
Two large listed companies recently colluded with each other to fix the price of a product
they both sell in the UK market. Collusion of this type is an example of market failure due to:
A inequality of resources
B external costs
C market power
D resource immobility
C Collusion is an example of market power exerted by a few suppliers. SAMPLE PAPER
Webcraft plc has a dominant position in its markets. It has received notice that it is being
investigated under Chapter 1 of the Competition Act 1998.
The following activities have been colluded in by Webcraft plc.
Activity 1 Limiting production markets
Activity 2 Agreeing with another organisation to limit competition
Activity 3 Restricting technical developments
Which of the activities may, individually, have given rise to such a notice?
A Activity 1 only
B Activity 2 only
C Activity 3 only
D Activities 1, 2 and 3
B Limiting production markets – No (this is an abuse of a dominant position, covered by
Chapter II of the Act)
Agreeing with another organisation to limit competition – Yes
Restricting technical developments – No (this again is an abuse of a dominant position)
