Government intervention in product markets

Question 1

What body ensures mergers and takeovers are within guidelines and done properly?

Answer 1

The competition and Markets authority (CMA)

Question 2

Give three roles of industry regulators

Answer 2

.Regulators are rule enforcers
.A surrogate for competition
.Appointed by the govt to oversee how the market works
.Carrying out investigations into mergers and acquisitions

Question 3

What type of judgement does price regulation include?

Answer 3

It involves a normative judgement on behalf of the government/authorities

Question 4

Give two arguments for price capping with a monopoly

Answer 4

.Capping is an appropriate way of curtailing the monopoly power of natural monopolies or dominant firms
.Cuts in the real price levels are good for household and industrial consumers
.Price capping helps stimulate improvements in productive efficiencies because lower costs are needed to boost business profits
.The price capping system can be a tool for controlling consumer price inflation

Question 5

Give two arguments against price capping

Answer 5

.Price caps have led to large numbers of job losses especially in the utility industry
.Setting different price cap regimes for different industries distorts the working of the price mechanisms
.The industry regulator may not have enough accurate information which could lead to reduced capital investment

Question 6

Give three ways in which a government could control monopoly power

Answer 6

.Quality standards
.Performance targets
.Cost-plus pricing

Question 7

How could a government promote contestability and competition?

Answer 7

.De-regulation of markets
.Opening up of monopoly networks

Question 8

Give two potential advantages of the de-regulation of markets

Answer 8

.Where barriers to entry are broken down, market supply should expand
.Increased competition is strongly linked with allocative and dynamic efficiency as well as increased productivity
.Greater capital investment
.if firms have less pricing power they are more likely to seek increased profitability through cost reduction, boosting productive efficiency

Question 9

Give two arguments for privatisation

Answer 9

.Private companies have a profit incentive to cut costs and be more efficient and raise productivity
.Govt gains revenue from the sale of assets
.If a state monopoly is replaced by a number of firms this will lead to lower prices
.Privatisation can create a shareholder democracy

Question 10

Give two arguments against privatisation

Answer 10

.Social objectives are given less importance
.Some activities are best run by the state because they are strategic parts of the economy
.Govt loses out on any dividends from any future profits
.Shares are often bought/held by large institutions such as pension funds and insurance funds

Question 11

Give a case for contracting out jobs

Answer 11

.Opening public services up for competition can save the taxpayer money and reduce a countries fiscal deficit
.Private sector businesses may be more likely to achieve productive efficiency improvements and cost savings-leading to improved value for money
.Businesses in the private sector may be more innovative

Question 12

Give two arguments against contracting out

Answer 12

.Businesses bidding to win contracts may sacrifice quality of service as a way of lowering their costs
.Doubts about some employment practices of some companies
.Contracting out requires proper monitoring which involves extra spending

Question 13

Give two arguments for state ownership

Answer 13

.Nationalised firms can target social objectives
.Firms might charge lower prices-not focused on pure profit maximisation
.Natural monopolies in the state sector can achieve economies of scale
.Losses of state owned firms are absorbed by tax payers and can lead to higher budget deficits

Question 14

Give two arguments against state ownership

Answer 14

.Absence of shareholder pressure might lead to dis economies of scale and therefore higher prices
.Lack of market competition can lead to X inefficiency
.Firms may lack an incentive to innovative
.Losses of state owned firms are absorbed by taxpayers and can lead to higher budget deficits

Question 15

Give an argument for rail nationalisation

Answer 15

.Rail network is a natural monopoly suited to state control to achieve economies of scale
.Rail fares can be controlled to improve affordability for rail passangers
.Profits flow direct to the taxpayer rather than to shareholders of private train companies

Question 16

Give an argument against rail nationalisation

Answer 16

.Competition on lines is more important than who owns the railway
.Private sector firms are more likely to improve dynamic efficiencies and avoid x inefficiencies
.Possible to regulate more fares on services run by private train operating companies
.History of state-run railways in the UK