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microeconomics > 3.6 Government Intervention > Flashcards

3.6 Government Intervention Flashcards

1
Q

Which 5 elements of the firm does government intervention have an impact on

A

Prices
Profits
Quality
Choice
Efficiency

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2
Q

What are the aims of competition law?​

A

In a truly competitive market, consumers benefit from price competition, greater product development, improved product specifications and better quality of service between competitors.

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3
Q

Which types of behaviour does UK competition law seek to prevent?

A
  • competitors likely to restrict competition
  • non-competitors likely to restrict competition (supplier/consumer - monopsony power link)
  • prohibiting abusive practices with those with high market power
  • when a market doesn’t appear to be functioning effectively
  • prohibiting/modifying mergers that are likely to restrict competition
  • preventing the grant of a subsidy which is likely to restrict competition
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4
Q

State the role of the regulator in competition law​

A

The regulator is the industry specific specialist with extensive knowledge who work alongside the CMA.

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5
Q

What are the penalties for infringement of UK competition law

A

5 year imprisonment
Unlimited fines
Directors are disqualified from any director role for 15 years
contracts will become void and unenforceable

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6
Q

Which actions (investigations) can the CMA take against infringement of UK competition law

A

Dawn raids: unannounced
Take documents, emails and electronic file
Inspect any premises which may have information
Interview anyone who could be involved

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7
Q

CMA reviewing mergers conditions

EVAL link to 3.1 (Business Growth): success of a merger depends on (a) whether CMA intervenes and (b) how…​

A

There is an automatic review if:​
- The merger involves a takeover of a firm with more than £70m assets​
- The mergers would create a firm with more than 25% of the market​
- The merger involves a firm with an existing 25% market share​

If the merger is deemed to cause a ‘significant lessening of competition’ in one or markets, it will not be allowed to proceed (CMA blocks it).​

Alternatively, the merger may proceed subject to conditions such as disposal of assets (eg stores of the enlarged group), a price cap for a specified period, and a commitment to a certain amount of R&D funding.​

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8
Q

4 ways that the government can control monopolies

A

Price regulation
Profit regulation
Quality standards
Performance targets

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9
Q

Price regulation

A
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10
Q

Draw a price cap on a graph

A

Draw a horitontal curve under the equilibrium line.
show new/old CS/PS
PS falls CS rises
Shortage of QD-QS
Deadweight loss
All is level 4

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11
Q

Define profit regulation

A

The government can set a maximum level of profit that can be earnt by a monopolist . A profit cap is introduced to an industry where supernormal profit is regarded as excessive, or in industries where there is little competition/collusion is possible.

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12
Q

Draw a graph for profit regualtion

A

(like limit pricing)
Initially the firm is profit maximising and making a large profit
Profit cap is put in place
the business will no longer profit max and instead choose another point to operate at
lower price, increased quantity
they will still make SNP, just less

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13
Q

Effect of profit regulation on price

A

+ price is lower so CS increases
- less retained snp, less likely to be dynamically efficient
- less attractive to new entrants

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14
Q

Effect of profit regulation on profit

A

+ because profit falls, they are more liekly to be efficient, closer to AE
- less investment, less dynamic efficiency

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15
Q

Effect of profit regulation on choice

A

+ Choice increases from Q1 to Q2
- more firms exiting the market because of the decreased SNP will mean less choice

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16
Q

Effect of profit regulation on efficiency

A

+ Closer to allocatively efficiency
+ x-efficient
- less dynamic efficiency

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17
Q

Define Quality Standards

A

A monopolist may not have an incentive to produce the highest quality goods, the govt will intervene by setting quality standards.

royal mail example

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18
Q

Define Performance Targets

A

Similar to quality standards - govt sets targets for a variety of different outputs for a firm

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19
Q

Effect of QS/PT on choice

A

+ if more efficient, more quantity, choice increases, increased labour mobility
- lack of tangible evidence of improvement

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20
Q

Effect of QS/PT on efficiency

A

+ firms are forces to be more efficient (x, dynamic, allocative)
- loss making and can’t be dynamically, other inefficiencies

21
Q

Effect of QS/PT on quality

A

+ quality improves, ARMR shift right
- reputational impacts and fines

22
Q

Effect of QS/PT on price/profit

A

potential increases due to improved service more demand more revenue

23
Q

What are the 4 ways the government promotes competition and contestability

A

deregulation
promotion of small businesses
competitive tendering for govt contracts
privatisation

24
Q

What are the 5 ways the government encourage growth of small businesses

A

training
subsidies
favourable loan interest rates
favourable tax arrangements
grants to entrepeneurs

25
Q

Define deregulation

A

The removal of statutory/government controls from markets

26
Q

What is the purpose of deregulation

A

to create more efficiency through increased competition in markets

27
Q

Royal Mails deregualtion

A
28
Q

Costs and benefits to firms of deregulation

A

+ economies of scale
+ decreased BTE, more contestable, more PE/AE
+ Excessive bureaucracy is removed, FC fall
- EOS aren’t achieved
- incumbent firms are forced to invest in R+D and innovation (due to comp - is expensive)
- competition minimises profit

29
Q

Costs and benefits to consumers of deregulation

A

+ lower prices
+ improved choice
+ improved quality
- firms may only supply in favourable markets (unlike the royal mail thing of going to all areas, consumers in some areas will suffer)
- no guarantee of high quality, TNT delivery drivers were dumping parcels as they were paid for how fast they deliver, not the quality of their service

30
Q

State what competitive tendering for govt contracts is

A

When public bodies such as the local authorities (NHS, National Rail) allow other public or private companies to tender for certain services. Through the tendering process, the public body will grant one company the right to run these services for a fixed number of years.

31
Q

What are the negative effects of competitive tendering

A
  • They are creating an artificial monopoly as this is an artificial barrier to entry, decreasing choice, decreasing AE
  • worrying as other firms are profit maximising and may not have the consumers as their best interest
  • as they are being MC=MR they may not go above and beyond to reinvest and just stick to the contract
32
Q

What are the positive effects of competitive tendering

A

+ can reach dynamic efficiency
+ quality of care due to specialisation
+ x efficiency achieved (this is due to the difference in objectives of private firms and govt/public)

33
Q

What does the success of CT for govt tendering depend on

A

Quality standards being met
Performance targets
(success rate, waiting lists, see x amount of patients)

34
Q

Define privatisation

A

The transfer of assets from the public sector (government) to the private sector

35
Q

State some examples of privatisation

A

Royal Mail
British Airways
British Telecoms

36
Q

What is the purpose of privatisation

A

increase efficiency
increase competition
increase contestability
decrease prices

37
Q

Trade unions and privatisation

A

Less trade union power as their is no longer a monopsony
more potential for investment
(i.e. british airways can now sell shares and invest in their aircrafts)

38
Q

privatisation NB

A

Privatisation doesn’t increase competition, the decreased barriers to entry which encourage new enterants will stimulate competition

39
Q

Define Nationalisation

A

The process of the government buying up private assets and taking them under state control
Opposite of privatisation

40
Q

State some examples of nationalisation

A

NHS
National Rail
National Grid
Post office

41
Q

Plan a nationalisation 25 marker

A

find plan on word

42
Q

Define monopsony and give one other condition

A

A monopsony is a single buyer in the market
Sellers in the market must not be able to sell their product to other firms outside the market.

43
Q

Give one benefit and one disadvantage of monopsonies on consumers, suppliers and the firm

A

consumers:
+ lower prices increased choice and quality
- may be charged higher prices, no guarantee for low P may be given to shareholders as dividends. Also low prices may = low quality

supplier: + high (nationwide) D, ArMr shift right. also forces them to be efficient
- may need to sacrifice profits and sales max

the firm: pay less VC = ACMC shift down, increased
- attract regulatory attention fines can increase FC

44
Q

How can the govt intervene to reduce monopsony power

A

1) appoint an independent regulator who has powers to force monopsonists to change their buying practices through a code of practice, with the threat of fines and naming & shaming for non-compliance.
2) block mergers where relevant
3) price regulation (min prices)

45
Q

limitations for each method of reducing monopsony power

A

regulator - does the fine act as a deterrent in compared to their SNP
blocking mergers - won’t receive the benefits (DE, EoS) of a merger
min price - surplus

46
Q

Define information asymmetry

A
47
Q

Define government failure

A

government failure arises when the government intervention to correct a market failure doesn’t achieve it’s objectives. Instead causing an inefficiency and misallocation of scarce resources meaning the socially optimal level of output and price is not achieved

48
Q

Define regulatory capture

A

microeconomics (10 decks)

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