Government Regulation of Markets

Question 1

Economic Systems

Answer 1

Main ways an economy can be run:

• Market economy (free market)
• Command economy
• Mixed economy

Question 2

Market Economy

Answer 2

Price: determined by equilibrium point
Products supplied: determined by supply and demand
Distribution of products: based on price and who can afford to buy them

Question 3

Command Economy

Answer 3

Price, products supplied and distribution is all dictated by the government

Question 4

Mixed Economy

Answer 4

A combination of free market and command.

Question 5

Market Failure

Answer 5

When a market fails because supply and demand do not result in an outcome that satisfies consumers and suppliers. Examples include monopolies, demerit goods and inappropriate prices

Question 6

Monopoly

Answer 6

Where there is a sole supplier of a good or service in a market.

Positives: some industries are served more efficiently by a monopoly (utilities), large companies have a positive impact in industries where R&D costs are high.

Negatives: can set excessive prices, big companies may form a cartel

Question 7

Cartels

Answer 7

Companies work together to keep prices high or restrict supply to ensure limited competition in the industry. Can be official or unofficial

Question 8

Competition Policy

Answer 8

Addresses monopolies, abusing market power and mergers and acquisitions

Question 9

Nationalisation and Privitisation

Answer 9

Industries that are more efficient with a monopoly may be nationalised, ie when the state owns the industry (like the NHS)

Some industries may be privatised to increase competition, but set up an industry body to regulate. A state owned industry is sold to a private owner (like rail travel)

Question 10

Abusing Market Power

Answer 10

Examples include:
Companies colluding to restrict supply and inflate prices

Creating barriers to entry - reducing prices to below average cost to prevent entrants

Exclusive distributer/retail/supplier agreements

Imposing switching costs

Collusion between two suppliers

Question 11

Collusion

Answer 11

Two suppliers privately agreeing to a pricing strategy

Question 12

Mergers and Acquisitions

Answer 12

M&A’s judged to be against the public interest can be blocked by a gov.

Merger = two companies combine

Acquisition = one company buys another

Question 13

Inappropriate Pricing

Answer 13

Sometimes in a market economy, the equilibrium can be too low without gov intervention, for example farming. If there’s high supply of a crop, price is low and jobs become at risk. Low supply drives prices up and people can’t afford to eat.

Question 14

CAP (Common Agricultural Policy)

Answer 14

EU agricultural policy to provide various programmes and subsidies to farmers. Farmers need protection as they’re at risk from big retailers, weather, tech, and governments know food supply is important

Question 15

CAP

Answer 15

Advantages:
Producers guaranteed stable income
Stable income can go to R&D
Stable supply and prices for customers
Can address other issues, e.g environment

Disadvantages:
Possibility of surplus products
Misallocation of resources

Question 16

Maximum Pricing

Answer 16

Introduced where equilibrium price is too high. Used when:
Customers exploited by monopoly
Unexpected shortage threatens price increase
Ensure affordability to all sectors of society
Reduce inflationary pressures

Question 17

Maximum Pricing Shortages

Answer 17

Max price is below equilibrium so there is excess demand and possible shortages. Shortages create:
Black markets
Reduced supply
Reduction in quality

Question 18

Externalities

Answer 18

The way anyone who isn’t a seller or consumer is affected by a transaction

Question 19

Negative Externalities

Answer 19

Third parties are negatively affected. Can be dealt with through:
Tax - e.g excise duty
Evaluation of social cost
Regulation 
Increased info for consumers
Compensation schemes

Question 20

Positive Externalities

Answer 20

Third parties positively affected. Can encourage positive externs by:
Increase supply
Increase demand
Evaluation of social benefit

Question 21

Merit Goods

Answer 21

Goods which are considered suitably important and necessary so as to warrant being provided through public finances, e.g education.

Everyone should have access, but consumers unaware of the benefits

Often provided by the state to prevent under consumption

Question 22

Demerit Goods

Answer 22

Goods which harm consumers in some way or are socially unacceptable.

People are unaware of/ignore the costs of using the good and it harms the consumer or is socially unacceptable.

Regulated or banned through tax, law and advertising

Question 23

Public Goods

Answer 23

Goods not produced by the market but are necessary and so produced by gov interv.

Non availability - you can’t stop anyone from consuming it and non-rivalrous - one person’s consumption doesn’t reduce another’s

Question 24

Public Goods

Answer 24

Advantages:
Wouldn’t be produced otherwise
State provision at large scale means EoS
Cost to individuals is kept low

Disadvantages:
No one can opt out
No allocative efficiency as production levels are dictated by the gov, not the market

Question 25

Allocative Efficiency

Answer 25

Where level of production is consistent with consumer demand

Question 26

Environmental Converns

Answer 26

Gov may intervene in free markets to protect the environment. Can do this by:

Taxing companies for pollution and using revenue to clean areas affected

Regulating amounts of pollution