Government Intervention

Question 1

Price controls: definition

Answer 1

Putting a maximum price to which certain markets are allowed rise to but not go past.
E.g gas, food, petrol, rent

Question 2

Price control: benefits of a price cap on rent

Answer 2

Helps essential low wage economy
Prevents excessive rent
Landlords still make acceptable profits
Spreads people’s incomes

Question 3

Price control: disadvantages to a price cap on rent

Answer 3

Rich people take advantage of the system
No incentive to buy property to rent or build
Shortage of property
Interferes with the free market

Question 4

CMA: Competition and Mergers Authority

What do they do

Answer 4

They work to promote the competition for the benefit of the consumer

Question 5

CMA: how do they do their job

Answer 5

Investigate mergers
Investigate laws
Enforce consumer protection
Bring criminal penalties
Work with the European competition commission
Investigate issues with competition and customers

Question 6

CMA: markets they have investigated

Answer 6

Energy 
Banking
Insurance
Milk
Pay day loans
Betting

Question 7

CMA issues

Answer 7

Time- 2 years
Lack of persecution
Regulatory pressure (pressurise the regulator)
Firms argue monopolies aid the consumer
Top managers at CMA switch to the other side

Question 8

CMA Anti completion:

Answer 8

A company work with another one so that they sell prices equally in order to not lose any market share.

Question 9

CMA Example:

Answer 9

Spread information about all banks so that the consumer picks the one they want.

Question 10

Windfall tax: definition

Answer 10

A one off tax on a supernormal profit making firm. E.g banking, energy, oil

Question 11

Windfall tax positives

Answer 11

Forces firms to drop price
Cheaper products for all
Makes an inelastic product more available 
Uses tax to give subsidies to poorer
Threat

Question 12

Windfall tax negatives

Answer 12

Leads to higher AC
Unfair
On its OWN it won’t work
Could lead to firms not reinvesting

Question 13

Performance targets: definition

Answer 13

Regulators set targets in the absence of competitors

Question 14

Performance targets: regulators for rail, energy and water.

Answer 14

Rail (ofrail)
Energy (ofgem)
Water (ofwat)

Question 15

Performance targets: how do you calculate the price rise

Answer 15

RPI +- X (rail, energy)

RPI +- K (water)

Question 16

Performance targets: reasons for regulators

Answer 16

Guarantees very high standards
Forces firms to reinvest into infrastructure
Excessive supernormal profit does not occur

Question 17

List the types of government intervention:

Answer 17

Price controls
Breaking up monopolies
Windfall taxes
Performance targets
Privatisation and nationalisation
Deregulation
Subsidies
Self regulation

Question 18

Natural monopoly: definition

Answer 18

A monopoly that forms by itself

Question 19

Natural monopoly: characteristics

Answer 19

Exceptionally high set-up costs- into billions
Exceptionally high fixed cost -salaries
Massive economies of scale are needed to reduce AC
As times goes on MC is minimal

Question 20

Natural monopoly: sunk cost definition

Answer 20

A cost you cannot recover once you have spent it– advertising

Question 21

Natural monopoly graph: explain it

Answer 21

The LRAC and LRMC and both sloping with the MC underneath the AC
MR and AR same as monopoly

Question 22

Deregulation: definition

Answer 22

The reduction or elimination of government power in a particular industry. Usually done to create more competition.

Question 23

Deregulation: problems with the government owning and controlling firms

Answer 23

Inefficient
No competition
No incentive to reduce AC
No opportunity, money better spent elsewhere

Question 24

Deregulation pros

Answer 24

Increase competition leads to greater efficiency which leads to cheaper prices and costs

Government regulation often involves excessive costs of bureaucracy

Question 25

Deregulation cons

Answer 25

Difficult to create effective competition in an industry which is a Natural Monopoly

Compromise to public services its poor quality
E.g postal service– places missed, staff lost

Question 26

Deregulation: which curve moves, where and why?

Answer 26

AC moves down

People made redundant
Lower wages
Sack management

Question 27

Self regulation: definition

Answer 27

The industry policing itself

Question 28

Self regulation: industries it has occurred in and why?

Answer 28

Betting, advertising– ASA= advertising standards authority

Keep customers
Doesn’t offend anyone
Competition fair