Government Intervention in Business

Question 1

what do the CMA (competition and markets authority) investigate

Answer 1

-formal cartels
-price fixing
-monopoly power

Question 2

what can the results of a CMA investigation be

Answer 2

-fines
-prosecution of individuals
-blocking a merger

Question 3

what are the objectives of the CMA

Answer 3

• increase competition
  -penalise anti competitive behaviour
  -appoint regulators for natural lacks of competition

Question 4

examples of mergers blocked by the CMA

Answer 4

-Asda and Sainsbury’s –> to stop price rises and consumer experience falling –> consumer welfare
-Microsoft and Activision –> to stop a lack of innovation

Question 5

what is a benefit of blocking mergers

Answer 5

protected consumer welfare via keeping prices low and choices high

Question 6

what are the disadvantages of blocking mergers

Answer 6

-a merger could increase consumer welfare as lower LRAC via economies of scale could mean higher profits and therefore innovation
-investigations can take a long time and create an opportunity cost or the time and money spent

Question 7

example of when the CMA imposed a fine

Answer 7

£10 million for owners and manufacturers of thyroid tablet

Question 8

what are the 3 ways governments intervene to control monopolies

Answer 8

• price regulation (RPI - X)
  -profit regulation
  -quality standards and performance targets

Question 9

how does price regulation work to control monopolies

Answer 9

-limits the price rises of an industry
-RPI is the annual increase in inflation
-X is the regulators view of potential efficiency savings the firm can make

Question 10

how does profit regulation work as a way to control monopolies

Answer 10

if overall profits are deemed to high the regulator can force the firm to cut its prices or recommend the gov imposes a windfall tax

Question 11

how do quality standards and performance targets control monopolies

Answer 11

firms can be fined if the standard falls below a certain level

Question 12

what are the problems of government intervention to control monopolies

Answer 12

-regulatory capture –> regulator becomes sympathetic to firms
-asymmetric info –> no incentive for firms to be truthful when they know more than the regulator
-fines may not be large enough to disincentivise poor standards or performance

Question 13

what are the 5 ways governments can intervene to promote competition and contestability

Answer 13

-promotion of small businesses
-reducing barriers to entry
-deregulation
-competitive tendering for gov contracts
-privatisation

Question 14

how can the promotion of small businesses promote competition and contestability

Answer 14

-subsidies and easier access to finance makes it easier to enter an industry
-increased supply –> lower prices –> increased choice –> increased consumer welfare

Question 15

how do reducing barriers to entry promote competition and contestability

Answer 15

-reducing the length of patents encourages new firms to enter

Question 16

how does deregulation promote competition and contestability

Answer 16

-easier for new firms to enter –> more competition –> lower prices –> more choice –> increased consumer welfare

Question 17

how does competitive tendering for gov contracts promote competition and contestability

Answer 17

-bidding for the right to provide a service (e.g a school canteen) means that the contract is given to the firm offering best value for consumers

Question 18

how does privatisation promote competition and contestability

Answer 18

firms will profit maximise leading to greater efficiencies and increased consumer welfare

Question 19

what are the problems with
-the promotion of small businesses
-reducing barriers to entry
-competitive tendering
-privatisation
as a way to promote competition and contestability

Answer 19

-subsidies could be wasted if given to inefficient start ups
-reducing patent lengths may reduce incentive for innovation
-competitive tendering may mean firms only bid for profitable services e.g a bus route in city vs in rural area
-privatisation often occurs for natural monopolies so the lack of competition and inelastic demand means they can charge high prices

Question 20

what are the 2 ways government intervene to protect suppliers and employees

Answer 20

-restrictions on monopsony power of firms
-nationalisation

Question 21

how do restrictions on monopsony power of firms help to protect suppliers and employees

Answer 21

-CMA investigations mean they can fine guilty firms e.g ASDA, Tesco and Sainsbury’s for exploiting dairy farmers

Question 22

how does nationalisation help to protect suppliers and employees

Answer 22

-protects jobs
-could increase consumer behaviour
e.g Northern Rock (2007)

Question 23

why is government intervention to protect suppliers and employees not always effective

Answer 23

-fines don’t compensate the suppliers effected
-fines may not be large enough
-nationalised firms have less incentive to be efficient with costs and to innovate so could lead to decreased consumer welfare
-nationalisation is very expensive so creates an opportunity cost