Government intervention

Question 1

How can a government intervene to control monopolies?

Answer 1

• price regulation (prevent charging high prices by putting in an RPI - X aka price cap)
• profit regulation (corporate tax, UK 21% to 20%)
• quality standards
• performance targets (regulate quality)

Question 2

How can a government intervene to promote competition and contestability?

Answer 2

• enhance competition between firms through promotion of small business
• deregulation
• competitive tendering for government contracts
• privatisation (more competitive market and more efficiency) (assets transferred from public sector to private sector)

Question 3

How can a government intervene to protect suppliers and employees?

Answer 3

• restrict monopsony power of firms

- nationalisation

Question 4

What are the limits of government intervention?

Answer 4

• regulatory capture

- asymmetric information