Government Intervention

Question 1

What is meant by price controls?

Answer 1

A restriction governing a price a market can sell a product at

Question 2

What is meant by a maximum price in government intervention?

Answer 2

A product cannot be sold/bought for a price higher than the specified level.

Question 3

What impact does the government setting a maximum price have on the market?

Answer 3

Market supply falls
Market demand rises

Therefore there is excess demand, potential for market failure.

Question 3

What is a salary cap?

Answer 3

A salary cap is a limit placed on the total amount that a firm can pay out to its employees.

Question 4

What is the effect of a salary cap?

Answer 4

Market price falls

Question 5

What is meant by a minimum price in government intervention?

Answer 5

A product cannot be sold/bought for a price lower than the specified level.

Question 5

What is the effect of setting a minimum price level?

Answer 5

Market supply rises
Market demand falls

Question 5

What is a non-binding minimum price?

Answer 5

Ineffective intervention by the government in a market.

Setting a minimum price below the free market level.

Question 6

What is a non-binding maximum price?

Answer 6

Ineffective intervention by the government in the market.

Setting a maximum price above the free market level.

Question 7

What problems can price controls create in the market?

Answer 7

• Deadweight loss
  Price controls can prevent some beneficial exchanges from taking place.
• Black markets
  Illegal transaction which take place outside of the official market.
• Imperfect information
  Government need to have information about the market to set price at right level.

Question 8

What is meant by consumer sovereignty?

Answer 8

Wide choice of options allow consumers to dictate the nature of the market.

Question 9

How can the government prevent the formation of monopolies?

Answer 9

Prevention of mergers and acquisitions.

Question 10

How can the government break-up existing monopolies?

Answer 10

Ordering the sale of parts of a business.

Example, BAA selling off Gatwick and keeping Heathrow.

Question 11

How can the government monitor and regulate monopolies?

Answer 11

Ensure that monopoly power is not abused.

Question 12

What anti-competitive practices does the government ban?

Answer 12

• Price fixing
• Predatory pricing
• Restrictive contracts

Question 13

How does the government encourage competition?

Answer 13

• Reduction of barriers to entry
• Entrepreneur grants and tax relief
• Privatisation
• Free trade policy

Question 14

What is a public-private partnership?

Answer 14

A service which is provided through a partnership between the public sector and the private sector.

e.g A private company builds and runs a new hospital.

Question 15

What are the benefits of a public-private partnership?

Answer 15

• Efficiency
  Private companies have greater expertise and incentive to operate efficiently.
• Risk-delegation
  The contract can be written to ensure that the private company endures the consequences of over-spends and delays.
• No upfront costs
  The private sector often foots the initial bill, delaying the costs for the government.

Question 16

What are the costs of a public-private partnership?

Answer 16

• Incentives
  Private company aims to secure the highest profits possible, not the best service outcomes.
• Badly written contracts
  Examples of excessive profits for private companies in PPP deals.
• Interest rate divergence
  Private companies usually pay a higher interest rate to borrow than the government.