regulation and policy

Question 1

who enacts competition policy

Answer 1

-main UK regulator - competition and markets authority (CMA)
-European competition commission (EU)

Question 2

regulatory bodies (CMA)
specialist regulators

Answer 2

-ORR (rail regulator)
-CAA (airports) etc.`

Question 3

aims of competition policy

Answer 3

-prevent excessive pricing
-promote competition
-ensure quality standards and choice
-regulate natural monopolies and ensure effective privitisation of natural monopolies
-promote technological innovation

Question 4

when will competition authorities intervene

Answer 4

-antitrust and cartel agreements (fixed prices and restrict output to deter entry of new firms
-investigate mergers, if any merger creates a merger greater than 25%
-liberalise highly concerntrated markets
-monitor state aid control, make sure subsidies dont distort competition in another country/ industries/ other firms

Question 5

monopoly regulation
price regulation

Answer 5

-prices not allowed to increase the next year beyond RPI inflation
-RPI - x (airport charges), restrict prices below RPI where x = percentage promoting incentive for efficiency savings by cutting costs
-RPI +/- k, k = % where enough profits are made to allow capital investment

Question 6

monopoly regulation
price regulation
disadvantage

Answer 6

-level of x/k - information failure, could be set too high or too low and we assume regulators have perfect information
-costs(increase in tax), incentive to keep x down
-regulatory capture (bias regulators) - government failure

Question 7

monopoly regulation
quality control/ performance targets

Answer 7

e.g. trains, gas and electricity, NHS

Question 8

monopoly regulation
quality/ control/ performance targets
disadvantages

Answer 8

-unintended consequences (performance decreases, e.g. NHS, GP rushing work)
-game the system - as trains only allowed few delays, there will be extended train times

Question 9

monopoly regulation
profit control covering

Answer 9

profit control covering costs and adding % returns on capital employed
short term cost, long term return

Question 10

monopoly regulation
price control covering
disadvantages

Answer 10

-assymetric information (over report capital employed)
-incentives to increase costs
-incentive to over employ capital

Question 11

monopoly regulation
windfall taxes on profit

Answer 11

taxing monopoly profit increasing costs of production, shifting MC upwards increasing prices, decreasing quanitity

Question 12

monopoly regulation
windfall taxes on profit
disadvantages

Answer 12

-worsens monopoly outcomes
-tax evasion/ avoidance
-less innovation
-under-reporting on profit

Question 13

monopoly regulation
merger policy

Answer 13

> 25% = investigation, break merger against public interest by selling of stores in areas where competition is distorted

Question 14

monopoly regulation
marlet liberalising policies to promote competition

Answer 14

-privatisation
-deregulation
-reducing trade barriers

Question 15

evaluation of monopoly regulation

Answer 15

government failue-
-level of information
-costs and benefits
-regulatory capture

benefits of monopoly

Question 16

advantages of privatisation

Answer 16

-increased allocative efficiency, strive to produce G/S of increased quality that consumers want
-decrease in x inefficiency - less waste as firms will decrease costs to remain competitive
-efficiency incentive which drives dynamic efficiency (maybe lower prices over time)

Question 17

when a private sector replaces a public sector

Answer 17

a private sector will run a business much more efficiently as they have a profit motive

Question 18

disadvantage of privatisation

Answer 18

-limited competition - productive and allocative inefficient if competition doesn’t come
-loss making services cut even if socially desirable
-loss of natural monopoly and loss of EoS benefits = productive inefficiency

Question 19

pros and cons of privatisation depends on

Answer 19

-level of competition post privatisation
-amount of government regulation, tight = more competitive, lose = possible monopoly
gov regulation may force firms to produce services that is socially desirable
private firms dont take into account positive/negative externalities due to self interest, gov make them pay through tax

Question 20

deregulation

Answer 20

when governments reduce legal barriers to entry in given industries to incentive more firms entering the market promoting competition and efficiency

Question 21

advantages of deregulation

Answer 21

-more firms increases consumer choice - incentivisation allocative efficiency to satisfy consumers and stay ahead of competition
-increase produce and x - efficiency - incentive min costs and max profits
-increased dynamic efficiency - invest anything to get ahead

Question 22

disadvantages of deregulation

Answer 22

-loss of natural monopoly, increases AC and decreases productive efficiency, also wasteful duplication of resources - alloocative inefficiency
-formation of oligopolies and local monpolies possibly increasing prices

Question 23

pros and cons of deregulation depends on

Answer 23

-short run vs long run
-height of other barries to entry
-level of government regulation

Question 24

nationalisation

Answer 24

the process of taking an industry into public ownership

Question 25

agreements in favour of nationalisation

Answer 25

-state run monopoly has greater potential for EoS (PE, decrease in price and AC) -more focus on service provision as gov look to max social welfare, so needs and wants of society are met - allocative efficiency at a low price -less likely to be market failures arising from externalities as gov look to max socail welfare and doesnt ignore social costs/ benefit - AE -public sector can be a vehicle for macro-economies control, manipulate wages to control inflation/ control employment levels in a recession

Question 26

arguements against nationalisation

Answer 26

-diseconomies of scale, risk is large for huge state to run a monopoly (coordination, communication etc.) increasing AC/ loss of PE/ increase prices -lack of incentive to minimise cost - increase in costs increases prices -complacency/ wasteful production - increases cost, x -inefficiency -lack of supernormal profits - dynamic inefficiency, no innovation, R+D gains -highly expensive, burden on tax payer (opportunity cost) -higher prices due to low comp and lack of competative drive - allocative inertia -greater risk of moral hazard - individuals who dont take risks bare costs (politicians and tax payers) -politician priorities

Question 27

evaluation points for nationalisation

Answer 27

-funding vs delivery of key public services -PPPs better (public private partenership) -role of regulation -competition is private sector (high comp not necessary, low comp maybe) -size and objective of private firms (large EoS benefit)

Question 28

invention

Answer 28

creation of a new idea without it necessarily becoming a commercial reality

Question 29

innovation

Answer 29

transforming an invention into a commercial reality

Question 30

creative destruction

Answer 30

innovation/ invention of new products destroys previous markets and pre-existing businesses and jobs e.g. air Bnb destroying traditional hotels/ online TVs/ music streaming and dvds and tapes

Question 31

what can innovation/ inenvtion lead to

Answer 31

more capital or labour intensive production car - more cpaital -medical - labour over the last 40/50 more job have been created due to technology reduces costs of production

Question 32

more cpital/ labour intensive production graph

Answer 32

-reduces CoP over time -LRAC decreases -specialist capital brought in achieving specialist EoS -increase in quantity, MES takes piece or greater level of quality, more EoS to take place

Question 33

efficiency gains from innovation/ invention

Answer 33

increase in PE and AE increase in dynamic efficiency

Question 34

how market structures change due to innovation/ invention

Answer 34

-increase in no. firms lower BtoE -more competative -product homogeneity = greater variety -knowlede increases