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Economics- A2 Unit 3 (Micro) > Government Intervention > Flashcards

Government Intervention Flashcards

0
Q

Office of Fair Trading

A

A government body responsible for increasing consumer welfare, investigating anti- competitive practices and abuses of market power, which they can punish by fining firms up to 10% of turnover.

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1
Q

Regulation

A

When a government monitors, prohibits, or limits the production or price of certain goods and services so that s more socially optimal level is produced.

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2
Q

Competitive Commission

A

A government body which investigates matters referred to it by the OFT concerning monopolies, mergers and the economic regulation of utility companies.

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3
Q

Resale Price maintenance

A

Fixing a price at which a customer can sell on a good or service.

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4
Q

Price Capping

A

A form of regulation where the price of key utilities is limited to increase consumer welfare. The most typical form is RPI- X regulation. RPI (inflation) - x (saving the firm is expected to make by increasing their overall efficiency) e.g. inflation was 2% and X was set at 5%, the firm would be expected to reduce its price by 3%. In the USA they tend to focus on capping profits rather than prices.

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5
Q

Key Performance Indicators

A

Used by an organisation to evaluate its performance in a particular activity e.g. Keeping the average waiting time for customers on their telephone lines to under five minutes.

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6
Q

Deregulation

A

The process of removing government controls from markets.

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7
Q

Performance Targeting

A

A goal is set by government or a regulator for firms to achieve, sometimes with a potential sanction if they fail to achieve it.

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8
Q

Contracting out

A

Getting private sectors firms to produce the goods and services which are then provided by the state of its citizens.

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9
Q

Competitive Tendering

A

When private sector firms compete against each other in a bid for government work contracts e.g. Private sector cleaning firms competing to clean an NHS hospital in their area.

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10
Q

Public Private Partnership (PPP)

A

A partnership between the public sector and the private sector to deliver goods and services.

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11
Q

Private Finance Initiative (PFI)

A

A type of PPP where a private firm builds public services or infrastructure such as schools and hospitals which the government pays them to use. This is normally in the form of an annual fee; contracts usually last 25-30 years. Once the contract expires the asset is then owned by the government. Over the course of the contract the private sector firm could also be involved in maintaining the asset or even running it.

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12
Q

What year was the Competition Act?

A

1998

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13
Q

What year was the Enterprise Act?

A

2002

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14
Q

Competition Policy

A

The legal framework that exists to promote firms from abusing market power, enforced primarily by the competition and markets authority.

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15
Q

Positives of Privatisation

A
  • Price competition.
  • Increased quality e.g. British Gas, waiting time.
  • Greater investment within the firm.
  • Short run, injections of funds.
  • Government spends less on managing industries.
  • Employees may gain shares, which would lead to increased productivity, due to them sharing in the profits.
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16
Q

Negatives of Privatisation

A
  • Market forces and profit motive may reduce the benefit to consumers.
  • The government may not gain a lot by selling, as buyers may be aware that the government needs to sell, which will drive the price down.
  • BBC- adverts, may become biased.
  • Lose positive externalities we get from accessing free services.
  • Profit motive, means that regulation may be needed.
  • Larger firms can take advantage of economies of scale.
  • Still need regulation to avoid cartels.
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17
Q

What does Competition Policy do?

A
  • Promoting free trade (removal on tariffs.)
  • Encourage competition through growth of small of firms.
  • Encourage competition by preventing firms from getting too large.
  • Regulate natural monopolies.
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18
Q

What year was the Competition Act?

A

1998

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19
Q

What year was the Enterprise Act?

A

2002

20
Q

Examples of PFI schemes

A
  • M6
21
Q

Positives of PFIs

A
  • If there was not private investment, it would not have been built in the first place.
  • Political success as there are more schools, hospitals etc.
  • Lack of risk.
  • Eventually the government will own it, short term payments.
  • The government will only become part of it once it is built, the private firm will bear the costs of such things as time delays.
  • > This will lead to private sector firms to become more efficient -> profit motive.
  • > If they are engaged with lots of profits they may benefit from economies of scale.
22
Q

Negatives of PFIs

A
  • Private firms will profit maximise, this could lead to poor quality infrastructure.
  • Payments come first, opportunity cost.
  • In long run due to interest it may not be sustainable.
  • Too much mobility between private and public sector, vested interest.
  • Inflexibility.
  • Not transparent.
23
Q

Examples of UK regulators…

A
  • Ofcom (Telecommunications)

- Ofgem (Gas and Electricity)

24
Q

What is the typical form of price cap?

A

RPI- X

25
Q

What alternate method does the USA instead of price capping?

A

Profit Capping

26
Q

Positives of RPI- X

A
  • The regulator can see price increases depending on the state of the industry and potential efficiency savings.
  • If the firm cuts costs by more than X they can increase their profits (there is an incentive to cut costs- productive efficiency.)
  • Increases consumer surplus.
  • Increases equality.
27
Q

Negatives of RPI- X

A
  • Regulatory Capture, in which the regulator represents the firm rather than regulating it.
  • It is costly and difficult to decide what the level of X should be.
  • Firms may argue regulation are too strict and do not allow them to make enough profit for investment.
  • If a firm becomes very efficient, it may be penalised by having higher levels of X, so it cannot keep its efficiency saving.
28
Q

Key Advantage of KPI

A

Not related to price.

29
Q

Negatives of KPI

A
  • Skew organisational goals e.g. Schools, 100% A*-C at GCSE.
  • Used to distract consumers from high prices.
  • Vague/ subjective.
30
Q

Rate of Return

A

The firm is limited on the rate of return it is permitted to make, thereby preventing it from making excessive profits. This is not used in the UK.

31
Q

Negatives of Rate of Return

A
  • Over investment in assets may lead to higher costs, to prevent high profits (gold- plating.)
  • No incentive to decrease costs, would not be productively efficient.
32
Q

Price Monitoring

A

Wait and see what happens.

33
Q

Positives of Price Monitoring

A
  • Greater flexibility, can adjust to unforeseen events.
  • Cheaper.
  • Firms still have an incentive to reduce costs.
  • Allows firms to manage their own investments, firms will know more about investment than the regulator body.
34
Q

Negatives of Price Monitoring

A
  • Difficult to define criteria, subjective- how much profit us too much?
  • Useless, threat of price cap regulation needs to be in place.
  • Too little, too late?
35
Q

Performance Targeting

A

Set a goal for the firm to achieve.

36
Q

A criticism of regulation is…

A

That it is too narrow.

37
Q

Examples of Anti- Competitive Practices…

A
  • Resale price maintenance.
  • Predatory Pricing.
  • Refusal to supply competitor or customer.
  • Discriminating pricing policies.
  • The tie in of non- related goods or services.
38
Q

Competition Act- 1998

A
  • Defined anti-competitive behaviour, e.g. collusion, predatory pricing, price discrimination to profit maximise.)
  • Fines of up to 10% of annual UK turnover for every year in which a violation has taken place up to a maximum of 3 years.
39
Q

Enterprise Act- 2002

A
  • The act made by the office of fair trading which made it formally independent from the government and provided it additional powers.
  • It is now possible for searches to be carried out under warrant on businesses.
  • Prosecution for up five years for the Directors of the companies.
40
Q

Limitations of the OFT

A
  • Not tough enough on firms due to insufficient knowledge and understanding.
  • Low license fees mean firms could just restart business.
  • There is often a lack of evidence.
  • Only some culprits are punished.
  • The fines are not threatening enough.
  • When guidelines are issued they are very subjective.
  • It is not threatening enough.
  • Often take too much time to investigate, which could lead to the closure before the fines are implemented.
41
Q

What conditions must there be for the OFT to investigate a merger?

A
  • The business being takeover has a turnover in the UK of at least £70 million.
  • The combined business supply at least 25% of a particular product or service in the UK and the merger results in an increase in the share.
42
Q

Criticisms of the CC

A
  • Blocking a merger, could lose the benefits from that merger.
  • > Economies of Scale, productive efficiency, lower prices.
  • > Higher profits, more R&D, greater allocative/ dynamic efficiency.
  • The cost of fines could be passed on to the consumer in form of higher process particularly if the firm has monopoly power.
  • The cost of investigation itself.
43
Q

Is the UK or USA more anti- monopoly?

A
  • USA
44
Q

What is the theory of Second Best?

A

We can make greater efficiency gains by focusing on evening out efficiency distortions in all markets rather than focusing on one sector.

45
Q

What are the OFT and the Competition Commission policy now known as?

A

Competition and Markets Authority- April 2014

46
Q

What is the OFT involved in?

A
  • Enforcing consumer and competition law e.g. investigating.

- Merger control (if after initial investigation, complexity requires further investigation- refer to CC.)

47
Q

What does the Competition Commission do?

A

Conducts in- depth inquires into-

  • Mergers
  • Markets
  • The regulation of the major regulated industries.
48
Q

What factors does the CC consider when investigating a merger?

A
  • Market Share
  • Degree of Competition
  • Elasticity
  • Revenue
  • Contestability
  • Alternatives
  • Consumer Welfare
  • Anti Competitive Nature

Economics- A2 Unit 3 (Micro) (6 decks)

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