Edexcel International A Level Economics Government Intervention Exam Questions

About Edexcel International A Level Economics Government Intervention

Government intervention is the final topic of Unit 3 in Edexcel International A Level Economics. Unlike the Unit 1 topic on intervention in markets, this one focuses on how governments and competition authorities control the behaviour of firms with market power. You learn the reasons for competition policy, the tools used to regulate mergers, monopolies and prices, how governments promote competition and how they protect suppliers and workers. You also consider the limits of intervention, including regulatory capture and asymmetric information. Examiners expect you to use the theory of the firm from earlier Unit 3 topics to evaluate whether intervention improves efficiency and consumer welfare.

What you need to know

• Control of mergers Competition authorities can investigate and block mergers that are likely to reduce competition substantially, or allow them with conditions such as selling part of the business.
• Control of monopolies Price regulation, for example a price cap of RPI - X or CPI - X for privatised utilities, profit regulation, quality standards and performance targets. Fines can be imposed for anti-competitive behaviour such as collusion and predatory pricing.
• Promoting competition Deregulation to remove barriers to entry, competitive tendering for contracts and privatisation to introduce market incentives.
• Protecting suppliers and employees Restrictions on monopsony power, for example codes of practice for large buyers, and labour protection such as a national minimum wage, health and safety rules and employment rights.
• Limits to intervention Regulatory capture (regulators act in the interests of the firms they regulate), asymmetric information between regulators and firms, and the cost of regulation.

Common mistakes in Government Intervention

• Confusing this topic with Unit 1 intervention. Here the focus is on firms with market power, so discuss competition policy and regulation of monopolies, not just taxes and subsidies.
• Misreading a price cap formula. With RPI - X, if inflation is 3% and X is 1%, prices can rise by at most 2%.
• Assuming blocking every merger helps consumers. Some mergers create economies of scale and lower prices, so intervention can cause government failure.
• Describing regulatory capture vaguely. Explain that the regulator comes to rely on, or be influenced by, the firms it regulates, so its decisions favour those firms.
• Forgetting monopsony. Large buyers can squeeze suppliers, which is a reason for intervention too.

Try three Government Intervention exam-style questions