Government Intervention

Question 1

Intervention to control mergers

Answer 1

The minimum condition for investigation into mergers is if it will result in a market share of over 25%.

Or, if it meets the ‘turnover test’ of £70 million annually.

CMA blocked the proposed merger between Sainsburys and Asda.

Question 2

Intervention to control monopolies

Answer 2

The CMA will intervene to break up a monopoly if it is seen to be behaving in an anti-competitive way.

The government can act as a supplement for missing competition by raising taxes and regulating prices.

Question 3

Price Regulation

Answer 3

Price caps act as an upper limit on the retail prices of a firm’s goods.

It takes inflation into account by using the Retail Price Index (RPI).

Pros:
- It allows firms to keep any profits from efficiency gain.
-The factors are long term allowing for planning
Cons:
-Regulators can underestimate expected gains
-Regulatory Capture

Question 4

RPI-X

Answer 4

This takes the RPI Value and subtracts a value of ‘x’ determined by the regulator.

‘X’ represents the efficiency gains the regulator deems to be reasonable.

Question 5

RPI+K

Answer 5

This takes the RPI value and adds a factor of ‘K’ which is agreed with by the regulator.

K is a value of additional capital spending which is deemed to be necessary.

This is predominantly used by water companies to determine the price for each regional company.

Question 6

Profit Regulation

Answer 6

This allows firms to take a profit based on its capital stock, the rest being taxed

Pros:
-Encourages expansion of capital stock.
Cons:
-Encourages wasteful spending and understating stocks value.
-No incentive to boost efficiency.

Question 7

Performance Standards

Answer 7

Regulators can set performance standards for a firm to meet, resulting in a fine if not.

Question 8

Other Regulation

Answer 8

The credit crisis has resulted in heavy regulation of the banking industry, limiting the risks it can take.

The EU laws used to take precedence over UK laws, such as the limit on carbon emissions.

Question 9

Intervention to promote contestability

Answer 9

Governments can promote contestability by:
-Cutting red tape
-Reductions in barriers to entry/exit
-Regulation of monopoly power

Question 10

Competitive Tendering

Answer 10

The process of private firms competing to win a government contract.

Question 11

Limits of Government Intervention

Answer 11

Some limitations include:
-Government failure
-Regulatory capture
-Asymmetric information