Government Intervention

Question 1

How does the government intervene to control mergers?

Answer 1

• The Competition and Markets Authority (CMA) is the UK Gov regulator, ensuring that the creation of monopoly power is avoided and consumers are not exploited.
• Aims to prevent any single firm from gaining more than 25% market share.

Question 2

What are the different government intervention policies to control monopolies?

Answer 2

• Price regulation
• Profit regulation
• Quality standards
• Performance targets

Question 3

Price Regulation

Answer 3

• Monopolies aim to maximise profit, resulting in higher prices.
• The CMA uses maximum prices to lower prices

Question 4

Profit Regulation

Answer 4

• The CMA may choose to limit the supernormal profit a monopoly can earn.
• This is done by calculating the firm’s total costs and adding a percentage of profit to it.
• However firms may try to inflate their percieved costs to allow them more profit.

Question 5

What is meant by quality standards?

Answer 5

• One way to maximise profit is to reduce the quality of raw materials, which reduces product quality.
• Regulators can insists that certain quality standards are met.

Question 6

What is meant by performance targets?

Answer 6

Regulators can set performance targets, aiming to raise the quality of service.

Question 7

What are the government intervention policies to promote competition and contestability?

Answer 7

• Promotion of small businesses
• Deregulation
• Competitive tendering for government contracts
• Privatisation

Question 8

How does the promotion of small businesses promote competition and contestability?

Answer 8

• Increases the number of firms within the market
• Therefore increasing competition

Question 9

What is deregulation and how does it promote competition and contestability?

Answer 9

• Refers to reducing/eliminating government regulations and restrictions.
• It lowers barriers to entry and potentially reduced industry costs

Question 10

What is meant by competitive tendering for government contracts?

Answer 10

Occurs when the government draws up a specification for a good/service it wants and recieves bids from private firms to povide it.

• By outsourcing the supply rather than the government providing them, it generates more private sector activity.

Question 11

What is privatisation and how does it promote competition and contestability?

Answer 11

• Refers to the transfer of ownership and control of firms or assets from the state (public sector) to private sector.
• It encourages entrants to the industry.

Question 12

What are the government intervention policies to protect suppliers and employees?

Answer 12

• Restrictions on monopsony power of firms
• Nationalisation

Question 13

What is monopsony power and how do restrictions on monopsony power of firms protect suppliers and employees?

Answer 13

• Monopsony power = when there is a single buyer of a good/service in a market, giving the buyer considerable market power over the seller.
• Prevents exploitation which a monopsony has due to their market share.

Question 14

What is nationalisation and how does it protect suppliers and employees?

Answer 14

• Nationalisation = when the government takes control and ownership of firms which were previously in the private sector.
• Prevents exploitation
• Ensures better treatment of suppliers.

Question 15

What is the impact of government intervention on prices?

Answer 15

More affordable and more stable

Question 16

What is the impact of government intervention on profit?

Answer 16

Allows enough to keep firms in the industry (normal profit), but limits how much they make in order to protect consumers.

Question 17

What is the impact of government intervention on efficiency?

Answer 17

Reduces wastage by increasing competition.

Question 18

What is the impact of government intervention on quality?

Answer 18

Ensures that products are fit for purpose

Question 19

What is the impact of government intervention on choice?

Answer 19

Wider choice due to more competition and more economic activity.

Question 20

What are the limits to government intervention?

Answer 20

1. Regulatory capture
2. Asymmetric information

Question 21

What is meant by regulatory capture and how does it limit government intervention?

Answer 21

• Refers to when firms influence the regulators to change their decision/policy to align more with the interests of the firm.
• Leads to biased decision making and reduced overight

Question 22

What is asymmetric information and how does it limit government intervention?

Answer 22

• Occurs when one party in a transaction has more information than another party.
• Decisions by the gov may not be the best decision, becausee they dont have the full or relevant information in the market they’re trying to regulate.