Chapter 12 - External Regulation of Business Flashcards
Why is regulation of business necessary? 2
To address market failure and externalities, and to protect the public interest.
What is regulation in the context of business?
Any form of state interference with the operation of the free market, including regulating demand, supply, price, profit, quality, entry, exit, information, technology, or any other aspect of production and consumption.
When does market failure occur?
Market failure is said to occur when the market mechanism fails to result in economic efficiency, so the outcome in terms of allocation of resources is sub-optimal.
What are public goods? Provide an example.
Goods that are non-excludable and non-rivalrous, such as street lighting.
What are merit goods? Provide an example.
Goods that have long-term benefits to society, such as education.
How can the government address market failure? 6
- By providing public and merit goods
- Controlling the means of production through state ownership of industries
- Redistributing wealth through the system for direct taxation of income e.g. people taxed and money goes to those who need it in the form of benefits.
- Creating demand for output that creates jobs, such as defence contracts or major public works such as road-building
- Influencing supply and demand
- Regulating markets.
How can the government address market failure via infleuncing supply and demand?
Influencing supply and demand through:
– Price regulation (minimum or maximum prices) e.g. minimum wage
– Indirect taxation on expenditure on some goods and services, so that supply is restricted as the price to consumers includes the tax but suppliers only receive the net-of-tax price (the supply curve shifts to the left) e.g. tobacco
– Subsidies paid by the government to suppliers (shifting the supply curve to the right), in order:
. To encourage more production
. To keep prices lower for socially desirable goods whose production the
government wishes to encourage
. To protect a vital industry such as agriculture
in what scenarios is regulation of markets the most appropriate policy response? 4
. Market imperfection – where monopoly power is leading to inefficiency, government will intervene through controls on, say, prices or profits in order to try to reduce the effects of the monopoly
. Externalities – a possible means of dealing with the problem of external costs and benefits is via some form of regulation. Regulations might include, for example, controls on emissions of pollutants, restrictions on car use in urban areas, the banning of smoking, compulsory car insurance and compulsory education.
. Asymmetric information – regulation is often the best form of government action whenever informational inadequacies are undermining the efficient operation of markets. This is particularly so when consumer choice is being distorted. Examples here would include: regulation of financial reporting and financial services; legally enforced product quality/safety standards; consumer protection legislation; the provision of job centres and other means of improving information flows in the labour market.
. Equity – the government may resort to regulation to improve social justice. For example, legislation to prevent discrimination in the labour market; regulation to ensure equal access to goods such as health care, education and housing; minimum wage regulations and equal pay legislation.
What is market imperfection?
where monopoly power is leading to inefficiency, government will intervene through controls on, say, prices or profits in order to try to reduce the effects of the monopoly
What are externalities?
a possible means of dealing with the problem of external costs and benefits is via some form of regulation. Regulations might include, for example, controls on emissions of pollutants, restrictions on car use in urban areas, the banning of smoking, compulsory car insurance and compulsory education
How does the government address asymmetric information?
regulation is often the best form of government action whenever informational inadequacies are undermining the efficient operation of markets. This is particularly so when consumer choice is being distorted. Examples here would include: regulation of financial reporting and financial services; legally enforced product quality/safety standards; consumer protection legislation; the provision of job centres and other means of improving information flows in the labour market.
What is the role of equity in business regulation?
the government may resort to regulation to improve social justice. For example, legislation to prevent discrimination in the labour market; regulation to ensure equal access to goods such as health care, education and housing; minimum wage regulations and equal pay legislation.
What is the primary goal of business regulation to protect public interest?
To balance commercial needs with societal needs and ensure the interests of shareholders, directors, managers, and other stakeholders are met.
What is an example of a public good?
A. Street lighting
What is a method used by governments to address market failure?
B. Providing public goods
Which of the following is an example of addressing externalities?
A. Providing subsidies for renewable energy
How does regulation address asymmetric information?
B. By improving information flows and enforcing quality standards
What is the primary focus of equity in business regulation?
B. Ensuring equal access to resources
What is the legal definition of regulation?
A rule created by the government or an administrative agency that interprets or applies a statute.
What are the purposes of delegated legislation? 2
- To implement a primary piece of legislation appropriately.
- To address specific circumstances during the implementation of a primary legislation.
What are the ways businesses respond to regulations? 4
- Entrenchment of a practice (non-response).
- Mere compliance (passing on compliance costs).
- Full compliance (adjusting behavior and processes).
- Innovation (exceeding regulations) - Porter hypothesis
Which of the following describes ‘Full Compliance’? A. Ignoring regulations
B. Adjusting behavior and processes to comply
C. Innovating beyond requirements
D. Avoiding compliance
B. Adjusting behavior and processes to comply
What does the Porter Hypothesis suggest?
Strict environmental regulations can drive innovation, making production more efficient and compensating for compliance and innovation costs.
According to the Porter Hypothesis, what is the main effect of strict environmental regulations? A. Increased compliance costs
B. Promotion of inefficiency
C. Triggering innovation and improved competitiveness
D. Elimination of environmental concerns
C. Triggering innovation and improved competitiveness
What is regulatory compliance?
Systems or departments in businesses ensuring awareness and adherence to relevant laws and regulations.
What are two examples of regulatory bodies mentioned? 2
- The Information Commissioner.
- The Competition and Markets Authority (CMA).
Why is competition important in a free market? 3
- It allocates resources efficiently.
- It encourages innovation and efficiency.
- It creates choice for consumers.
Why are monopolies generally not in the public interest?
Because they do not allocate resources efficiently.
What does the Competition Act 1998 prohibit?
Agreements, business practices, and conduct that damage competition.
To whom does the Competition Act 1998 apply?
It applies to all businesses, regardless of size, and includes penalties of up to 10% of annual worldwide revenues.
What is collusive behavior? Examples 5
An agreement between businesses to prevent, restrict, or distort competition, such as fixing prices or sharing markets. Examples:
Fixing purchase or selling prices or other trading conditions
Agreeing to limit or control production, markets, technical development or investment
Sharing markets or supply sources
Applying different trading conditions to equivalent transactions, thereby placing some parties
at a competitive disadvantage
Making conclusion of contracts subject to acceptance of supplementary obligations
Which of the following is an example of anti-competitive behavior? A. Offering discounts to consumers
B. Fixing purchase or selling prices
C. Increasing production to meet demand
D. Allowing open competition
B. Fixing purchase or selling prices
What is a cartel?
A type of collusive behavior where businesses agree not to compete, which can include price fixing, market sharing, or bid rigging.
What are the consequences of being part of a cartel?
Membership in a cartel can lead to criminal sanctions.
Under what conditions is collusive behavior more likely to occur? 5
- Few competitors in the market.
- Similar characteristics of products.
- Established communication channels between competitors.
- Excess capacity in the industry.
- General economic recession.
What is an example of collusive behavior in a cartel?
Businesses agreeing not to compete by fixing prices, dividing regions or customers, or engaging in bid rigging.
What legal consequence can result from being a member of a cartel?
Membership in a cartel can lead to criminal sanctions.
When are cartels or collusive behavior more likely to occur? 5
- When there are few competitors.
- When products have similar characteristics, limiting competition on quality or cost.
- When communication channels between competitors are already established.
- When the industry is suffering from excess capacity.
- During times of general economic recession.
Which of the following is a factor making collusion more likely? A. A large number of competitors
B. Products with significant differentiation
C. Few competitors in the market
D. Rapid industry growth
C. Few competitors in the market
What does Chapter II of the Act address?
It addresses situations where a business abuses its dominant position in the market by behaving independently of competitive pressures.
What are examples of abusive practices by a dominant business? 4
- Imposing unfair purchase or selling prices.
- Limiting production, markets, or technical development to the prejudice of consumers.
- Applying different trading conditions to equivalent transactions.
- Attaching unrelated supplementary conditions to contracts.
What factors help determine market dominance? 3
- Market share (generally more than 40% of the market).
- The number and size of competitors.
- The potential for new competitors to enter the market.
Which of the following indicates market dominance? A. Less than 10% market share
B. Presence of many strong competitors
C. More than 40% market share
D. No barriers to market entry
C. More than 40% market share
What is the role of the Competition and Markets Authority (CMA)?
To promote effective competition across the UK economy and protect consumers.
What responsibilities does the CMA have? 7
- Investigating mergers.
- Conducting market studies.
- Investigating breaches of anti-corruption agreements.
- Bringing criminal proceedings against individuals committing cartel offenses.
- Enforcing consumer protection legislation.
- Encouraging regulators to use their competition powers.
- Considering regulatory references and appeals.
What are the implications of CMA enforcement for businesses? 3
- CMA officials can enter premises to investigate potential breaches.
- CMA can impose a fine for failure to comply with an interim measure in respect of a merger of up to 5% of annual revenue
- Competition Disqualification Orders may be made against directors.
Which of the following is NOT a responsibility of the CMA? A. Investigating mergers
B. Regulating taxation policies
C. Conducting market studies
D. Enforcing consumer protection legislation
B. Regulating taxation policies
What are externalities?
External costs or benefits, such as pollution or environmental damage, that affect third parties.
What methods can the government use to regulate externalities? 4
- Price regulations (setting maximum or minimum selling prices).
- Direct or indirect taxation or tariffs.
- Subsidies to suppliers (e.g., to encourage exports).
- Regulation using quotas, standards, and fines.
What are examples of government regulations to address externalities? 3
- Quotas: Physical limits on output to meet social optimum.
- Standards: Requirements that must be complied with.
- Fines: Penalties for businesses failing to meet standards.
Which of the following is NOT a method to regulate externalities? A. Setting quotas
B. Enforcing standards
C. Offering unlimited subsidies
D. Imposing fines
C. Offering unlimited subsidies
What is insider dealing?
A crime under the Criminal Justice Act 1993 where individuals use insider information to make a profit or avoid a loss.
What constitutes insider dealing? 3
- Using significant inside knowledge (e.g., takeover plans, profit falls) to trade shares.
- Engaging someone else to deal on their behalf.
- Disclosing insider information to others.
Which of the following is NOT an example of insider dealing? A. Using insider knowledge to trade shares
B. Sharing insider information with a friend
C. Investing based on publicly available data
D. Asking someone to trade shares on your behalf using inside information
C. Investing based on publicly available data
What does the EU Market Abuse Directive require?
It requires individuals engaged in the stock market to follow the FSA’s Code of Market Conduct, which outlines standards of behavior.
What actions are considered market abuse? 3
- Insider dealing: Misuse of insider information.
- Manipulating devices: Spreading misleading information to distort prices.
- Distorting/misleading behaviors: Influencing others to act in a particular way.
What is an example of market abuse? A. Investing in stocks based on market analysis
B. Spreading false information to influence stock prices
C. Using legally obtained public data for trading
D. Educating others on market trends
B. Spreading false information to influence stock prices
What is fraudulent trading?
When a company continues to trade with the intent to defraud creditors or for any fraudulent purpose, as defined under the Insolvency Act 1986.
What are the consequences of fraudulent trading? 2
- Directors and managers may face personal liability for company debts.
- Criminal sanctions may be imposed under the Companies Act 2006.
Which of the following is an example of fraudulent trading? A. Paying off company debts using personal funds
B. Trading with the intent to defraud creditors
C. Making a legal payment to suppliers
D. Filing accurate financial statements
B. Trading with the intent to defraud creditors
What is wrongful trading?
When directors of an insolvent company fail to take reasonable steps to minimize losses to creditors, as defined under the Insolvency Act 1986.
What are the potential consequences of wrongful trading? 2
- Directors may be required to contribute to the company’s assets.
- Chartered accountants are judged by higher standards and may face liability.
Why might a director be disqualified?
To protect the public and creditors, a person may be disqualified for a wide range of reasons under the Company Directors Disqualification Act 1986.
What is money laundering?
The process of concealing the origins of illegally obtained money, regulated under the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2007.
What are the key regulations governing money laundering? 2
- Proceeds of Crime Act 2002.
- Money Laundering Regulations 2007.
Which country has the greatest influence over global regulation?
The US has the greatest influence, followed by the EU and the UK.
What role do international organizations play in global regulation?
World Trade Organisation (WTO), International Monetary Fund (IMF) and International Chamber of Commerce (ICC) also have extensive power to influence the development of regulations
How do US corporations affect global regulation?
US corporations use their influence over their government and international bodies to promote their interests.
Which of the following organizations influences international regulations? A. World Trade Organisation (WTO)
B. International Monetary Fund (IMF)
C. International Chamber of Commerce (ICC)
D. All of the above
D. All of the above
What is the doctrine of comparative advantage?
It states that countries should focus on producing goods they can make most efficiently, allowing resources to be allocated effectively.
What are the two main routes for industrialization in international trade? 2
- Import substitution: Protecting local producers to produce goods previously imported.
- Export-led growth: Relying on cheap labor to ensure economic growth by exporting.
What are the economic advantages of international free trade? 5
- Specialization: Countries focus on what they produce efficiently.
- Surplus and deficit: Countries export surplus resources and import deficient ones.
- Competition: Increased competition improves efficiency and quality.
- Larger markets: Economies of scale reduce costs and improve resource efficiency.
- Trading links: Support political links, such as those in the EU.
What is a disadvantage of international trade?
High transport costs can negate the advantages of specialization and trade.
Which of the following is NOT an advantage of international trade? A. Increased competition
B. Support for monopolies
C. Economies of scale
D. Development of trading links
B. Support for monopolies
What is protectionism?
Government actions aimed at protecting home industries against foreign competition by restricting imports or favoring exports.
What are the effects of tariffs or customs duties? 3
- Increase the price paid for imported goods by domestic consumers.
- Leave the price for foreign producers unchanged or lower.
- Revenue is transferred to the government sector.
What are import quotas?
Restrictions on the quantity of a product that can be imported, leading to higher prices for consumers and higher output for domestic producers.
What are the impacts of import quotas? 4
- Domestic producers supply more.
- Fewer imports (in volume).
- Consumers pay higher prices for lower quantities.
- The government collects no revenue.
What are hidden subsidies for exporters and domestic producers? 2
- For exports: export credit guarantees (insurance against bad debts for overseas sales), financial help (such as government grants to the aircraft or shipbuilding industry) and administrative assistance
- For imports: complex import regulations and documentation, or special safety standards demanded on imported goods and so on
Which of the following is NOT a barrier to free international trade? A. Tariffs
B. Import quotas
C. Subsidies for domestic producers
D. Free trade agreements
D. Free trade agreements
Why do government gives grants to its domestic producers?
When a government gives grants to its domestic producers, for example regional development grants for new investments in certain areas of the country or grants to investments in new industries, the effect of these grants is to make unit production costs lower. These give the domestic producer a cost advantage over foreign producers in export markets as well as domestic markets.
What is the effect of devaluing a nation’s currency?
It makes imported goods more expensive, encouraging people to buy domestic output.
Which of the following is NOT a barrier to free international trade? A. Tariffs
B. Import quotas
C. Subsidies for domestic producers
D. Free trade agreements
D. Free trade agreements
