Government Intervention

Question 1

Define competition policy

Answer 1

Competition policy refers to the set of rules and powers that are used to increase competition within the market.

Question 2

Define competition authorities

Answer 2

Competition authorities (the government’s means of intervening in the markets), take increasingly strong action to control mergers and monopolies, promote competition and protect suppliers and employees.

Question 3

Give 3 examples of competition authorities (3)

Answer 3

1. The Competition and Markets authority (CMA) in the UK
2. The Antitrust Commission in the USA
3. The European Competition commission

Question 4

How does government intervention affect mergers in a market? (3)

Answer 4

1. Competition authorities can prevent mergers from happening
2. Or intervene to ensure mergers only occur with certain restrictions in place.
3. The CMA can also force firms to demerge.

Question 5

Why might price changes be hidden from the customer? (2)

Answer 5

1. Price changes may be hidden from the customer because price charts or tariffs are often overcomplicated or not clearly presented to consumers.
2. And as a result, tariffs could be simplified and customers would then get the best deal possible.

Question 6

What role does the regulator have in monopoly behaviour and price increases by firms?

Answer 6

The regulator can impose a limit on the price increases by firms. This is normally done through the RPI, where prices are allowed to rise by RPI-X, where X is a measure of the amount of savings the regulator believes the firm can make.

Question 7

What is profit regulation? State one issue with it.

Answer 7

This is when the government can set a maximum percentage profit relative to a firm’s assets.

The problem is often that the firm has no incentive to be efficient in its capital spending.

Question 8

What is meant by ‘quality standards’ in government intervention?
Explain how this is made more effective

Answer 8

The government can control the choice for customers by offering a limited quantity of licenses or permission to operate in some markets, depending on the quality being of a certain, high standard.

This is made more effective by giving a limited franchise period, which will not be renewed if the quality is unacceptable.

Question 9

Why might performance targets be set? (1)

Give an example

Answer 9

1. Set to increase service quality
   e. g. Office for Rail Regulation (UK), measures train punctuality and ensures passengers can get refunds for late arrivals of trains.

Question 10

Explain the Private finance initiative (3)

Answer 10

1. This is a form of financing major public projects such as motorway construction.
2. The private sector funds the building, maintains the servicing, and rents or leases the service to the government over a guaranteed period (e.g. 25 - 30 years).
3. It’s beneficial as the government can achieve projects today without having to raise the funds in the current period.

Question 11

Explain ‘contracting out’

Answer 11

This is thought the reduce waste and inefficiency in the public sector, and to increase the level of competition in the private sector, which leads to lower prices and more choice for consumers.

Question 12

How does deregulation promote competition and contestability? (2)

Answer 12

1. Removing direct controls on firms can allow more competition in markets
2. By allowing more firms to compete for a certain service, consumers have more choice, and better service and lower prices.

Question 13

How does privatisation promote competition and contestability? (3)

Answer 13

1. This is the selling of public sector assets to the private sector.
2. The action can force the firm to increase its profitability because it can no longer rely on government subsidy.
3. The competition from other firms might also increase overall competition in the market, removing x-inefficiency.

Question 14

How does competitive tendering promote competition and contestability? (3)

Answer 14

1. This is when government acquires goods or services by extending to suppliers to bid or ‘tender’ a proposal.
2. The bid with the lowest price wins the order, factors related to quantity, shipping etc.. are assessed later
3. This forces suppliers to compete and consequently, the purchaser and taxpayer will gain better value for money.

Question 15

Can government intervention protect suppliers and employees? If so, give an example. (2)

Answer 15

1. Government intervention can help to protect suppliers (from monopsonies). E.g. the Groceries Code Adjudicator ensures that large supermarkets treat their suppliers lawfully and fairly.
2. They investigate complaints and arbitrates in disputes, especially when supermarkets change their orders at the last minute.

Question 16

Define nationalisation

Answer 16

When private firms are taken back into public or state ownership. The government may purchase all the privately-held shares.

Question 17

List the 5 aims of government intervention

Answer 17

1. Promote competition between firms, so that prices are lower and choice for consumers is wider.
2. Ensure profitability is not at the expense of abusing market power.
3. Make markets work efficiently. Competing firms tend to be careful to keep costs low and find ways to reduce wasteful procedures.
4. Contribute towards improved efficiency in individual markets and enhance competitiveness.
5. Ensure minimum standards of quality and action such as mergers which might reduce consumer choice.

Question 18

Explain how government intervention may fail to bring about the socially optimal level.

Answer 18

Through regulatory capture, government intervention could fail. This is when the regulators are ‘taken in’ by the firm , e.g. when a firm persuades the regulators that it is a good firm.

Question 19

How could asymmetric information ] make it difficult for authorities to investigate and discover anti-competitive practices?

Answer 19

The people operating the business are likely to know much more about the market, than the regulators, therefore they are at a disadvantage, when investigating the business.

Question 20

Inn what ways could the government prevent the abuse of monopoly power?

Answer 20

1) Ensuring that firms simplify their tariffs and notify consumers of the best deal available.
2) Impose a limit on price increases, so that consumers cannot be exploited.
3) The government has the ability to set performance targets to ensure that firms provide a minimum quality of service to their customers.
4) Deregulation - removing direct controls on firms can allow for increased competition which would lead to reduced costs and most likely improve the quality of service.