Government intervention: Practice Questions

What is a primary purpose of a government imposing an indirect tax on a good that generates negative externalities in consumption?

A government is concerned about the monopsony power of large supermarkets over small dairy farmers. Which government intervention strategy is specifically designed to protect these suppliers from exploitation?

A government introduces competitive tendering for the provision of local bus services, which were previously a public sector monopoly. What is the primary intended effect of this intervention on market contestability and efficiency?

A regulator is overseeing a monopoly utility company. The regulator decides to implement price regulation by setting a price cap of \( RPI - X \). However, over time, the regulator begins to rely heavily on the data provided by the monopoly and adopts a more sympathetic view towards the firm's profit requirements.

This scenario best illustrates which cause of government failure?

A regulator oversees a natural monopoly utility provider. The regulator has recently been criticised for regulatory capture. Which of the following best describes the outcome of regulatory capture in this context?

Explain one potential reason for government failure that could occur when a regulatory body is unduly influenced by the firms it is supposed to be supervising.

A government implements competitive tendering for a public sector service previously provided by a state-owned monopoly.

Evaluate the likely impact of this intervention on productive efficiency and the contestability of the market.

A government is concerned about the monopoly power held by a single telecommunications provider. To address this, the regulator introduces a price cap (maximum price) and quality standards for the service provided. However, critics argue that the regulator has become too close to the industry leaders.

(a) Discuss the case for government intervention in this market, referring to the potential outcomes of a pure monopoly. (3)
(b) Explain the term regulatory capture and how it might lead to government failure in this scenario. (3)
(c) Identify and explain one other method, besides price regulation, that the government could use to promote contestability in this market. (2)

A large multinational electronics company currently operates with a high degree of market power. The government is concerned about potential welfare losses and is considering various methods of intervention.

(a) Discuss the case for government intervention in this market, specifically explaining how a profit-maximising monopoly might lead to allocative and productive inefficiency. (4)
(b) Evaluate the likely impact of the government introducing a price cap (maximum price) on the firm's output and its total supernormal profit. (4)