3.6 Government intervention Flashcards
(27 cards)
What is the main competition regulator in the UK?
The Competition and Markets Authority (CMA)
The CMA aims to promote competition and ensure market efficiency.
What are the key aims of competition policy?
- Promote competition
- Ensure markets are efficient
- Protect consumer interests by keeping prices low and widening consumer choice
Why do governments intervene in markets regarding monopolies?
To control monopolies and prevent the abuse of monopoly power.
What is a consequence of monopoly power?
Reduction in overall economic welfare.
What is RPI-X?
A form of price capping used in privatised industries.
What does the variable X in RPI-X represent?
The amount in real terms that the price has to be cut by.
What is the impact of RPI +/- K in the water industry?
It limits how much firms can increase prices, considering necessary investments.
What is an advantage of RPI-X?
Encourages firms to be more efficient by cutting costs.
What is a potential risk associated with RPI-X?
It could limit how much profit a firm can make.
What is regulatory capture?
When regulators start working in favour of the firm due to biases.
What is the purpose of performance targets set by the government?
To ensure a minimum target is being met and regulate quality.
What role do Small and Medium Sized Enterprises (SMEs) play in a competitive market?
- Create jobs
- Stimulate innovation and investment
- Promote a competitive environment
What is deregulation?
The act of reducing how much an industry is regulated.
What does privatisation entail?
The transfer of assets from the public sector to the private sector.
What is a potential disadvantage of privatisation?
Firms might compromise on quality to maximize profits.
What is competitive tendering for government contracts?
The process where private firms compete to provide goods and services to the government.
What is monopsony power?
The market power held by a buyer, such as supermarkets negotiating lower prices from suppliers.
What does limiting price increases encourage firms to do?
Become more efficient
To lower their costs and increase profit margins.
What might firms do if corporation tax is high?
Pass the extra cost onto consumers
Resulting in higher prices instead of losing profits.
What is a potential effect of strict price caps imposed by governments?
Limited investment
Since the amount of profit that a firm makes is restricted.
At what level do private sector firms typically operate?
Profit maximising level of output and price
In contrast to public sector firms which operate at allocatively efficient levels (Q2 P2).
What do free market economists argue about competitive environments?
Firms have an incentive to become efficient
They must lower average costs to profit maximise.
What is allocative efficiency?
When firms produce goods and services that consumers want
This is necessary for sustaining profits.
What can governments ensure about firms through regulation?
That they meet minimum quality targets
This promotes social welfare.
