Government intervention (3.6.1) Flashcards
Who are the CMA?
The Competition and Markets Authority (CMA) is the UK Government regulator tasked with ensuring that the creation of monopoly power is avoided and that consumers aren’t exploited in markets
What are the main forms of consumer exploitation?
-Higher prices
-Less choice
-Poor quality products
What’s the way to control monopoly power?
Prevent it from forming in the first place
What is the key function of the CMA?
to monitor merger activity with the aim of preventing any single firm gaining more than 25% market share
What is another role of the CMA?
In addition to controlling merger activity, the CMA continuously intervenes in markets in order to promote competition and to protect the interests of consumer
What are some types of intervention in monopoly markets?
1.Price regulation-prices are normally put higher if monopoly so CMA use max prices to lower prices and increase output
2. Profit regulation- CMA may choose to limit the supernormal profit a monopoly can earn
3. Quality Standards- Way to maximise profits is by reducing the quality of the raw materials which reduces quality of good/service so certain quality standards can be set
4. Performance targets- raise quality of service and improve customer satisfaction
What are some types of intervention to promote competition and contestability?
- Promotion of small business- subsidies can help increase number of new entrants in industry and so promotes competition
- Deregulation- Gov regulations can increase industry costs or be barrier to entry so by removing can promote competition which increases contestability (freedom of entry into market)
- Privatisation- Firms hesitant to enter industry when dominant firm is owned by government. Privatisation encourages new entrants to industry as they feel they can compete more effectively with private firms
What are some types of intervention to protect supplier and employees? (Split into two)
Protecting suppliers:
-Anti monopsony laws + fines
-Firms self-regulate + trade fairly
-Appoint a regulator
-Subsidise firms suffering
- Set Minimum prices buyers have to pay supplier
-Nationalisation
Protecting Employees:
-NMW legislation
-Legislation on health and safety, working hours and employment conditions
-Trade unions being allowed
-Encouraging firms to adopt better practices and draw up company conduct (self-regulation)
What are the Advantages and Disadvantages of privatisation?
Advantages:
-Encourages greater competition
-Managers become more accountable
-Reduces government interference
Disadvantages:
-Some industries are important and so if privatised can be taken advantage of
-Externalities and inequality
What are the Advantages and Disadvantages of nationalisation?
Advantages:
-maximise social welfare
-Government consider externalities
-Minimum level of service guaranteed
-Dangerous for steategic industries to be in private hands
Disadvantages:
-Principle agent problem and moral hazard (losses covered by govt)
-X-inefficiency
-Influenced by governments decision
What are natural monopolies?
They arise in industries where the most cost-effective way to provide a good or service is for one company to do so alone, rather than splitting the market among several competitors.
