Government Intervention 4 Flashcards
4 (32 cards)
what does the CMA stand for?
Competition and markets authority
functions of the CMA
- Investigating mergers which could restrict competition (MERGER control)
-Enforcing consumer protection legislation - acts against businesses that take part in cartels or anti-competitive behaviour
- investigates entire markets if they think there are competition or consumer problems
whats a merger?
when to companies come together to for a bigger company with joint ownership
whats a takeover?
when one company takes control/ownership over another by buying out another company
why do the government have to intervein to control mergers ?
But why are mergers also good?
because mergers and takeovers can lead too:
- greater market concentration and monopoly power with loss of allocative efficiency
- higher prices for consumers
- lower quality g/s for consumers
- less choice for consumers
- less consumer surplus
- job losses
HOWEVER THERE ARE BENEFITS TO MERGERS :
- reduce market overcapacity
- greater profit and RnD leading to dynamic efficiency
- economies of scale = lower prices for consumers and cost savings
- UK firms may be able to compete globally
no 1. evaluation of merger control
- regulator does not have all the relevant information about possible costs and benefits
- cost of intervention is high with a wastefuluse of resourses
- significant time lag before a decision is made causing uncertainty in the market
no 2. 4 ways that government interventions can control monopolies ?
- price regulation
- profit regulation
- quality standards
- performance targets
what are the 4 utility regulators that regulate monopolies ?
- ofcom (television and radio and telecommunications)
- ofgem (Gas and electricity)
- ofwat (water)
- ORR (office for rail regulation)
explain price regulation
price capping monopolies.
price limits are set by using a formula:
- RPI (retail price index) - X (efficiency gains)
FOR EXAMPLE if the regulator believed that it was possible to acheive productivity gains of 2% per year and RPI was increasing by 3.5% than the maximum price increase would be 1.5%
- RPI + K (extra amount invested in capital)
whats price capping monopolies?
upper limit for the price increase that a firm can add to their retain prices.
- the focus is on controlling price to prevent abnormal profits
evaluation of price controls on monopolies
- imperfect information - none knows the allocatively efficient price
- regulators may be too soft on the companies they are regulating
- lower business profits = decreased reinvestment and investment
- firms might lower the quality to incease productivity
profit regulation is also used on monopolies , what is the impact of this ?
there is no incentive to make efficiency gains by innovation
- not rewarded for their success
quality standards are also monitored on monopolies why is this important?
because monopolies are focused more on maximising profits not quality, some firms maximise profits by reducing quality which is not good for consumers
- HOWEVER there may be asymetric information because the government may not have a clear understanding of the industrys quality standards
give examples of performance targets regulators can set on monopolies
- prices
- consumer choices
- improvements in quality of service
- costs e.g. setting targets for production costs
- minimum investment levels
evaluate the use of performance targets
- monopolists may find ways of getting around performance targets .e.g. train timetables being made longer so that trains are on time more of the time
- because monopolies find ways to get around targets, performance targets need to be changed frequently
- monopolists may resist targets if punishments dont reult in bad publicity and fines
No 3. Governments also intervien to promote competition and contestability, what are the 4 ways they do this?
- promotion of small businesses
- deregulation
- competitive tendering for government contracts
- privatisation
why is promoting small businesses a good way of enhancing competition ?
- smaller firms are more likely to innovate
- and new firms can challenge existing firms so this increases the competitiveness
- provide lots of jobs and GDP
what is deregulation ?
removal of any previously imposed regulations that have restricted competition.
deregulation is used to as a government intervention to increase competition , what are the PROS and CONS?
pros
- increases competition = greater efficiency = lower costs and prices for consumers
- saves money because regulations usually involves costs
cons
- deregulation could lead to poorer quality products
- deregulation may give firms greater monopoly power
what is the process of competitive tendering for government contracts?
- gov draws up specification for a good/service
- invites private sector firms to bid for the contract to deliver it
- firm offering the lowest price, wins the contract to deliver the good and service
what are the pros and cons of competitive tendering / contracting out?
pros
- cheaper
- private companies with experties will be more efficient than GOV
- lower cost for taxpayers (gov doesnt need to raise tax or borrow more) in the short run
- private sector firms have an incentive to cut costs (increase efficiency to raise profitS)
Cons
- cut costs = lower quality
- higher costs to taxpayers in the long run because it costs the government more to lease a hospital from a private company rather than owning it themselves
what is privatisation ?
its the transfer of businesses, intustry or servise from public to private ownership
what are the arguments for and against privatisation ?
- promotes competition
- innovation
- correct allocation of resourses
AGAINST - creates a private monopoly that is inefficient - increases prices, lack of investment
- externalities
No 4. what are the 2 ways Governments intervein to protect suppliers and employees ?
- restrictions on monopoly power of firms
- nationalisation
