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Economics A level - Jaya > Theme 3 - Government intervention > Flashcards

Theme 3 - Government intervention Flashcards

1
Q

Why might controlling mergers be necessary for the government?

A
  • Protect competition and monopoly power of firms
  • Better information in the market
  • Dynamic efficiency to drive innovation
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2
Q

How does the government intervene to control mergers?

A

The CMA will look into a merger and determine the impact on stakeholders especially consumers
They will intervene if:
- Combined market share above 25%
- Combined annual turnover of £70m

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3
Q

Give 3 benefits of controlling a merger

A
  • protection of workers
  • Less exploitation of consumers through higher prices and reduced choice
  • Protects smaller business etc
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4
Q

Give 3 costs of controlling a merger?

A
  • Mergers may increase competitiveness
  • Can’t benefit from Economies of scale
  • No benefit of FDI to help local economies
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5
Q

What are the 4 ways in which the government controls monopolies?

A

Profit regulation
price regulation
performance regulation
quality standards

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6
Q

What is price regulation?

A

This is when there is a maximum price at which a business or industry can set their prices at to prevent exploitation of consumers

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7
Q

What are 2 ways in which price caps are determined?

A

RPI + K
RPI - X

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8
Q

What is the difference between RPI +K and RPI - X?

A
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9
Q

What are the benefits of price regulation?

A
  • Lower prices for consumers
  • Dynamic efficiency gains from firms so that they lower prices and increase choice
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10
Q

What are the evaluations of price regulation?

A
  • Regulatory capture which is when regulators become fond of the business they regulate and they become lenient
  • RPI +K and RPI - X. some firms may lie about how much they will invest and it is hard to quantify X
  • Could lead to shut down point if the price is brought too low
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11
Q

What is profit regulation?

A

This is when the government taxes a business profits, sets a maximum amount of profit they can earn by capping how much rate of return they can earn on their investments

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12
Q

What are the benefits of profit regulation?

A
  • The firm may lower prices because they won’t need to charge higher prices to make more profit
  • Encourage a firm to be dynamically efficient
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13
Q

What are the costs of profit regulation?

A
  • X inefficiencies. If profits are capped, there is no incentive to lower costs so costs may increase
  • Lower quality products due to less dynamic efficiencies and reduced competition because of less investments into standing out from competitiors
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14
Q

What are quality standards?

A

A certain quality has to be met otherwise the firm could be fined for not meeting regulations

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15
Q

What are the benefits of quality satndards?

A

The firm is more likely going to be efficient because they will have higher quality products
- Costs may also be reduced because of less waste

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16
Q

What are the drawbacks of quality standards?

A
  • Time consuming to check the quality of all the products
  • Higher prices if more time and money is spent on quality checks
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17
Q

What are performance targets?

A

These are targets for firms to ensure that they are providing top quality service

18
Q

What are the benefits of performance targets?

A
  • Makes a business more efficient
  • Increase the productivity of a firm
19
Q

What are the drawbacks of performance related targets?

A
  • Reduce quality if too much time is being spent on meeting targets which is a form of unintended consequence
  • ‘gaming the system’ which many monopolists have ways to move around the system
20
Q

What are the drawbacks of performance related targets?

A
  • Reduce quality if too much time is being spent on meeting targets which is a form of unintended consequence
  • ‘gaming the system’ which many monopolists have ways to move around the system
20
Q

What are the drawbacks of performance related targets?

A
  • Reduce quality if too much time is being spent on meeting targets which is a form of unintended consequence
  • ‘gaming the system’ which many monopolists have ways to move around the system
21
Q

What is a windfall tax?

A

This is a extra levy imposed by the government on a company. It specifically targets firms which benefit from something that they were not responsible for

22
Q

What is regulatory capture?

A

This is when regulators grow fond of the business that they are regulating. This could lead to regulators reducing the level of regulation in the industry or in the business which could lead to a problem in terms of less efficiency if they aren’t efficiently regulated

23
Q

What are some example of regulatory capture?

A
  • Raising K too much or lowering X too little
  • Low quality standards
24
Q

What are the 4 main ways of making an industry more competitive and contestable?

A
  • Enhancing competition between firms through promotion of small business
  • deregulation
  • Competitive tendering for government contracts
  • privatisation
25
Q

What is meant by encouraging the growth of smaller businesses?

A
  • Reducing bureaucracy, improve access to finance, capping business rates, provide training and grants to potential small businesses
26
Q

What are anti-competitive practises?

A

These include: predatory pricing, limit pricing, price collusion and vertical integration

27
Q

What can happen to a firm if they are caught engaging in anti-competitive practises?

A

Set a fine up to 10% of annual revenue
Sentence CEOs to jail time
Name and shame the firm publicly

28
Q

How is deregulation a way to promote competition and contestability?

A

The removal of rules and regulations created by barriers to entry. It is a way of removing monopoly power

29
Q

What is competitive tendering?

A

This is when the government outsources part of production by setting up a contract and selling it to private firms. The firm that can offer a service for the best value for money wins the bid

30
Q

Benefits of competitive tendering?

A
  • Higher quality
  • Lowers costs to the government
  • The government can focus on other things
31
Q

Drawbacks of competitive tendering?

A
  • Adverse selection
  • Costly and time-consuming
32
Q

What is privitisation?

A

This is when a publicly owned firm is sold to the private sector

33
Q

Benefits of privitisation?

A
  • Encourages efficiency in the business
  • Lower cost and engage in productive efficiency
  • ## Reduces government interference
34
Q

Drawbacks of privatisation?

A
  • X-inefficient and less allocatively efficient
  • Organisational and managerial slack
35
Q

What are some examples of intervention to protect suppliers and employees?

A
  • Restriction on monopsony power
  • nationalisation
36
Q

What are some examples of restrictions on monopsony power?

A
  • Anti monopsony laws and an independent regulator
  • Fines
  • Minimum prices
  • Employee legislation
  • Trade unions
37
Q

What are the benefits of nationalisation?

A
  • Maximise social welfare instead of profits
  • Investments may be long-term instead of short term to give shareholders gains
  • The government considers externalities
38
Q

What are the negatives of nationalisation?

A
  • Moral hazard and the principal-agent problem
  • May experience x-inefficiency
  • Governments could run out of funds for public investment
39
Q

What are the two limits to government intervention?

A
  • Regulatory capture
  • Asymmetric information
40
Q

What is rate of return regulation?

A

An alternative to price-cap regulation is rate-of-return regulation. Rate of return regulation is a method of regulating the average price of private or privatised public utilities.

Economics A level - Jaya (26 decks)

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