[4.2.3] Arguments for and against regulation

Question 1

Define regulation

Answer 1

the creation of rules and sanctions within an industry in order to modify the economic behaviour of firms

Question 2

Why should a market be regulated? (Give 5 reasons)

Answer 2

• Reduce exploitation of consumers/ increase consumer surplus
• improve inequality in society (funding in schools/minimum wage)
• Reduce collusion/anti-competitive behaviour
• Increase AD via subsidies
• Maintain competition/ reduce monopolistic power
• Prevent over supply of a good
• Reduce demand for de-merit goods (eg tobacco products)
• Improve contest ability in the market

Question 3

Methods of Regulation in a market

Answer 3

• Competition banning policy/banning anti-competitive behaviour
• Taxation
• Fines
• Legislations (Health&Safety, Min. Wage, Anti-discrimination laws, standardised cigarette packaging)
• CMA intervention
• Price caps
• Minimum/ Maximum Pricing
• Re-nationalisation
  Quotas
• Subsidies (support smaller firms within an industry to become competitive/ensuring large firms don’t gain an unfair competitive advantage)
• Self-regulation?

Question 4

Benefits of Regulation (Name 3 Benefits)

Answer 4

• Protects consumers agains the abuse of monopoly power (high prices) **
• Creates an environment that will encourage firms to strive for productive efficiency through reduced costs (via price capping) in order to increase profits **
• Helps to ensure quality and choice are maintained in a monopolistic market **
• Increases consumer surplus by reducing prices of goods and services **
• Provides a fair playing field so that all firms in the industry have to follow the same rules and regulation **
• Ensures productive and allocative efficiency by removing any distortions in the market

Question 5

Costs of Regulation

Answer 5

• increases the costs to firms (e.g legal requirements) **
• can lead to productive inefficiencies **
• causing delays to be implemented
• waste of resources **
• regulations can be inefficient and misguided
• regulating what goods/services can be produced might lead to allocative inefficiency **
• profits of firms will be impacted –> less investment into capacity as well as R&D **
• might lead to less dynamic efficiency (productive efficiency of a firm overtime)

Question 6

Benefits of regulation to the consumer

Answer 6

• reduced exploitation **
• increased protection (from exploitation) **
• lower prices (increased consumer surplus) **
• increased quality/choice **
• better quality public goods due to taxation of firms

Question 7

Drawbacks of regulation to the consumer

Answer 7

• allocative inefficiency can lead to higher prices (over regulation)
• minimum pricing can lead to higher prices
• consumers MIGHT have to pay more tax to fund subsidies
• quotas can restrict supply (although in the long run this is seen to be sustainable eg: fishing)
• x-inefficiencies means quality will decrease

Question 8

Advantages of regulation to a business

Answer 8

• competitors will benefit from decreased power from dominant firms**
• can lead to increased innovation/productive efficiency/ increased EoS **
• subsidies can increase supernormal profits **
• minimum pricing can protect smaller firms (from larger firms implementing predatory/limit pricing) **
• improved reputation due to new industry wide standard
• provides a fair and open playing field for all firms

Question 9

Disadvantages of regulation to a business

Answer 9

• reduced monopoly power **
• increased costs to implement regulation
• reduced capital investment due to lower profits **
• reduced allocative efficiency **
• takes time to implement and causes delays
• might have to settle for lower profits **
• can’t collude/raise prices to maximise profits **
• re-nationalisation might mean that assets are undersold?