Theme 3 - Government intervention

Question 1

Why might controlling mergers be necessary for the government?

Answer 1

• Protect competition and monopoly power of firms
• Better information in the market
• Dynamic efficiency to drive innovation

Question 2

How does the government intervene to control mergers?

Answer 2

The CMA will look into a merger and determine the impact on stakeholders especially consumers
They will intervene if:
- Combined market share above 25%
- Combined annual turnover of £70m

Question 3

Give 3 benefits of controlling a merger

Answer 3

• protection of workers
• Less exploitation of consumers through higher prices and reduced choice
• Protects smaller business etc

Question 4

Give 3 costs of controlling a merger?

Answer 4

• Mergers may increase competitiveness
• Can’t benefit from Economies of scale
• No benefit of FDI to help local economies

Question 5

What are the 4 ways in which the government controls monopolies?

Answer 5

Profit regulation
price regulation
performance regulation
quality standards

Question 6

What is price regulation?

Answer 6

This is when there is a maximum price at which a business or industry can set their prices at to prevent exploitation of consumers

Question 7

What are 2 ways in which price caps are determined?

Answer 7

RPI + K
RPI - X

Question 8

What is the difference between RPI +K and RPI - X?

Question 9

What are the benefits of price regulation?

Answer 9

• Lower prices for consumers
• Dynamic efficiency gains from firms so that they lower prices and increase choice

Question 10

What are the evaluations of price regulation?

Answer 10

• Regulatory capture which is when regulators become fond of the business they regulate and they become lenient
• RPI +K and RPI - X. some firms may lie about how much they will invest and it is hard to quantify X
• Could lead to shut down point if the price is brought too low

Question 11

What is profit regulation?

Answer 11

This is when the government taxes a business profits, sets a maximum amount of profit they can earn by capping how much rate of return they can earn on their investments

Question 12

What are the benefits of profit regulation?

Answer 12

• The firm may lower prices because they won’t need to charge higher prices to make more profit
• Encourage a firm to be dynamically efficient

Question 13

What are the costs of profit regulation?

Answer 13

• X inefficiencies. If profits are capped, there is no incentive to lower costs so costs may increase
• Lower quality products due to less dynamic efficiencies and reduced competition because of less investments into standing out from competitiors

Question 14

What are quality standards?

Answer 14

A certain quality has to be met otherwise the firm could be fined for not meeting regulations

Question 15

What are the benefits of quality satndards?

Answer 15

The firm is more likely going to be efficient because they will have higher quality products
- Costs may also be reduced because of less waste

Question 16

What are the drawbacks of quality standards?

Answer 16

• Time consuming to check the quality of all the products
• Higher prices if more time and money is spent on quality checks

Question 17

What are performance targets?

Answer 17

These are targets for firms to ensure that they are providing top quality service

Question 18

What are the benefits of performance targets?

Answer 18

• Makes a business more efficient
• Increase the productivity of a firm

Question 19

What are the drawbacks of performance related targets?

Answer 19

• Reduce quality if too much time is being spent on meeting targets which is a form of unintended consequence
• ‘gaming the system’ which many monopolists have ways to move around the system

Question 20

What are the drawbacks of performance related targets?

Answer 20

• Reduce quality if too much time is being spent on meeting targets which is a form of unintended consequence
• ‘gaming the system’ which many monopolists have ways to move around the system

Question 20

What are the drawbacks of performance related targets?

Answer 20

• Reduce quality if too much time is being spent on meeting targets which is a form of unintended consequence
• ‘gaming the system’ which many monopolists have ways to move around the system

Question 21

What is a windfall tax?

Answer 21

This is a extra levy imposed by the government on a company. It specifically targets firms which benefit from something that they were not responsible for

Question 22

What is regulatory capture?

Answer 22

This is when regulators grow fond of the business that they are regulating. This could lead to regulators reducing the level of regulation in the industry or in the business which could lead to a problem in terms of less efficiency if they aren’t efficiently regulated

Question 23

What are some example of regulatory capture?

Answer 23

• Raising K too much or lowering X too little
• Low quality standards

Question 24

What are the 4 main ways of making an industry more competitive and contestable?

Answer 24

- Enhancing competition between firms through promotion of small business - deregulation - Competitive tendering for government contracts - privatisation

Question 25

What is meant by encouraging the growth of smaller businesses?

Answer 25

- Reducing bureaucracy, improve access to finance, capping business rates, provide training and grants to potential small businesses

Question 26

What are anti-competitive practises?

Answer 26

These include: predatory pricing, limit pricing, price collusion and vertical integration

Question 27

What can happen to a firm if they are caught engaging in anti-competitive practises?

Answer 27

Set a fine up to 10% of annual revenue Sentence CEOs to jail time Name and shame the firm publicly

Question 28

How is deregulation a way to promote competition and contestability?

Answer 28

The removal of rules and regulations created by barriers to entry. It is a way of removing monopoly power

Question 29

What is competitive tendering?

Answer 29

This is when the government outsources part of production by setting up a contract and selling it to private firms. The firm that can offer a service for the best value for money wins the bid

Question 30

Benefits of competitive tendering?

Answer 30

- Higher quality - Lowers costs to the government - The government can focus on other things

Question 31

Drawbacks of competitive tendering?

Answer 31

- Adverse selection - Costly and time-consuming

Question 32

What is privitisation?

Answer 32

This is when a publicly owned firm is sold to the private sector

Question 33

Benefits of privitisation?

Answer 33

- Encourages efficiency in the business - Lower cost and engage in productive efficiency - Reduces government interference -

Question 34

Drawbacks of privatisation?

Answer 34

- X-inefficient and less allocatively efficient - Organisational and managerial slack

Question 35

What are some examples of intervention to protect suppliers and employees?

Answer 35

- Restriction on monopsony power - nationalisation

Question 36

What are some examples of restrictions on monopsony power?

Answer 36

- Anti monopsony laws and an independent regulator - Fines - Minimum prices - Employee legislation - Trade unions

Question 37

What are the benefits of nationalisation?

Answer 37

- Maximise social welfare instead of profits - Investments may be long-term instead of short term to give shareholders gains - The government considers externalities

Question 38

What are the negatives of nationalisation?

Answer 38

- Moral hazard and the principal-agent problem - May experience x-inefficiency - Governments could run out of funds for public investment

Question 39

What are the two limits to government intervention?

Answer 39

- Regulatory capture - Asymmetric information

Question 40

What is rate of return regulation?

Answer 40

An alternative to price-cap regulation is rate-of-return regulation. Rate of return regulation is a method of regulating the average price of private or privatised public utilities.