Chapter 5 - Government intervention

Question 1

Why do governments intervene?

Answer 1

To solve market failure
CMA - Activision and Microsoft
- promotes competition - decrease prices
- protect consumer interests
- ensure markets’ efficiencies

Question 2

Measures to control monopolies and mergers

Answer 2

Price regulation
- EVAL: difficult to measure the exact price
Profit regulation - rate of return
- prices are set to allow coverage - operating costs and earn fair rate of return
- prevents from setting high prices
- EVAL: gives the incentive to employ too much capital to increase profits
Quality standards: ensure firms don’t exploit customers
- EVAL: requires political will and understanding to introducing
Performance targets - price, quality, consumer choice, punctuality, cost of production
- help improve the service
- EVAL: requires political will and understanding
Referral to regulatory authorities
- investigate monopolies
Legislation to control mergers and takeovers

Question 3

Measures to promote competition and contestability

Answer 3

Promotion of small businesses
- more firms in the markets
- increases innovation and efficiency
Deregulation - removal of legal barriers to entry to allow private enterprises to compete
Privatisation - sale of government equity in nationalisaed industries/other firms to private inverstors
Competitive tendering: government providing certain goods and services
Trade liberalisation: removal/reduction of restrictions/barriers to free exchange of goods and services

Question 4

Advantages of privatisation as a measure to promote competition and contestability

Answer 4

Greater competition
- Reduces x-inefficiency
Reduces gov interference
Managers become more accountable
- Poor performance: decrease in share prices

Question 5

Disadvantages of privatisation as a measure to promote competition and contestability

Answer 5

Fairer for the government to own the firm
Hat industries are to be owned by the government
Problems with externalities and inequality

Question 6

Limits to government intervention

Answer 6

Regulatory capture - government failure
- Agency is concerned with the the interests of businesses
Assymetric information - one party has more information
Inadequate resources
Lack of regulatory power

Question 7

Measures to protect suppliers and employees

Answer 7

Local sourcing of raw material and components
Employment legislation to protect workers from exploitation
Barriers to entry of foreign firms
Restrictions on the monopsony power of firms
Nationalisation - taking private assets into state ownership

Question 8

Impact of government intervention

Answer 8

Lower prices
Reduce supernormal profits
Increase productive, allocative and dynamic efficiency
Increase the quality
Increase consumer choice
- EVAL: some regulators are paid by the firms

Question 9

Government intervention in labour markets

Answer 9

If labour markets were left to free market forces, market failures will arise

Question 10

Types of government intervention

Answer 10

Maximum and minimum wage controls
Direct taxes

Question 11

Measures to reduce geographical immobility

Answer 11

Subsidies for people moving into areas with shortages of labour
Improving supply and Decreasing price of rented properties
Subsidise job creation - tax incentives

Question 12

Measures to reduce occupational immobility

Answer 12

Invest in training
Subsidise vocational training by private sector firms

Question 13

Measures to decrease discrimination and exploitation

Answer 13

Pass laws
Increase minimum wages