Regulating

Nationalism : occurs when the government takes control of a privately owned business; a
transfer of ownership from the private sector to the public sector

Competition and markets authority (CMA)

● Industry regulators in uk: cma-
● Policies for controlling monopoly: - price capping: setting a maximum price in an industry
-opening up of a market to new competition (liberalization)
- forced de- mergers/ business divestment in an industry
- better information on products for consumers to encourage switching
- industry adjudicator to help protect consumers against poor quality service
Tougher laws on and monitoring of price fixing/ collusion
● Recent uk merger investigation: asda- sainsbury/Paypal- izettle/ GVC-ladbrokes
● Why did they block asda- sainsbury merge: shoppers could face high prices/ reduce
quality/ less choice/
● Anti competitive behaviour: german carmakers collusion over emission/ salmon farmers
in price fixing/uk funeral industry : pricing
● Hotel booking sites investigated because
CMA: - promotes competition: lowers barrier to entry
- Protects consumer interests: keeping pricing low
- Investigates potential mergers between large firms
- Attempts to prohibit cartels and collusive behaviour
- Deals with issues relating to unfair contract terms and the use of misleading pricing
strategies.
The European United competition policy: - aims to promote competition among firms interacting
within the EU.
- Fines collusive behaviour and cartels
- Breaks up monopolies
- Prevents abuse of dominant market positions
- Analyse merges before allowing or prohibiting them
- Provides aid to firms that are considered to create effective competition
Employee protection:- decrease in industrial action eg. strikes
- Reduced costs for businesses that comply with the legislation
- With equal opportunities, businesses have that comply with the legislation
- With equal opportunities, businesses have full pick of candidates and so, in theory, can
employ the very best suited for the job.
- Increased motivation of workers

Advantages of regulation
● Increases consumer surplus, since goods and services are provided at lower prices.
● Encourages firms to meet minimum quality targets, and results in products which are
generally safe
● Helps to improve the quality of life for consumers and employees
 ● If regulation is harmonized, there can be fair rules for all business
● The flexibility of labor markets in the UK has resulted in lower levels of unemployment
and more job creation.
Disadvantages
● Increased the costs of firms eg. higher wages and better working environments
● If firms cannot collude, then their ability to increase their market power is limited
● Firms have to compete on price, which lowers their potential profits
Market failure in society
Merit goods: good or service that people underestimate the value of due to information failure(
positive externalities)
- May be under- supplied if left to a private enterprise, and are sometimes provided by
governments> museums, education, healthcare
Demerit goods: a good which can have a negative impact on the consumer/ but these damaging
effects may be unknown or ignored by the consumer
-usually have negative externalities- where consumption causes a harmful effect on a third
party> cigarettes and alcohol

Discuss the consequences of the over consumption of alcohol on society

- Increased accidents> higher death rate
- Increase demand health> pressure health services
- Higher crime
- Higher tax revenue
- Increased government spending
- Encourage black market
- Lower productivity
- Increased absence at work

● Public goods are non- excludable and non rival, and they are underprovided in a free
market because of the free rider problem.
● Non excludable: someone else is not prevented from consuming the good because its
beoing used by another person.
● Non rival: the benefit other people get from the good does not diminish as more people
use it.
● Free rider problem: people who do not pay for the good still receive benefits from it. This
can lead to the under- provision of such goods- or the lack of any provision at all.

Public goods such as can lead to market

● failure because: occupational immobility: the inability of labor the move between
industries, as they lack the necessary skills( structural unemployment)
-This leads to a waste of scarce resources (labor which is highly skilled) and represents
market failure
 ● Geographical immobility: occurs if moving to another area to work is difficult eg. family
and social ties, the financial costs involved with moving, variations in house prices and
living costs, transport costs
Asymmetric information
- Imperfect information: buyers and sellers don’t know everything
- Asymmetric information: either the buyer or the seller knows more than the other. This
leads to irrational decision making and utility is not maximized

Public finance initiatives(pfi)

-private firms are hired by the government to design, build, finance and operate public
infrastructure eg. schools, hospitals, social housing
- firms make their money back through long term repayments(25-30 years) plus interest
from the government
>don't get paid until the end> puts gov on debt> (become inefficient) may want to cut
corners to get paid faster> if doesnt get paid soon doesn't really stimulate growth in
economy
- The government can instead intervene by simply providing public goods and merit
goods, or it can subsidize governing bodies
Indirect taxes:
- A tax on expenditure(goods and services)rather than on income eg. VAT
- Increases production costs for producers, sot he supply curve shifts to the left
- As a result market price increases and demand contracts
- The impact of the externality decreases
- also , increases government revenue
Incidence of tax (ad valorm)
-as the price increases so does the value of the tax(distance between supply curves)
- producers could make consumers pay the whole tax(p3-p2) could lower sales and lose
them revenue
- producers might pay p1-p2, whilst consumers might pay p3-p1

Specific tax (unit tax)

- The amount of tax levied does not change with the value of the good, but with the
amount or volume purchased eg. excise duty, demerit goods
- Excise duty in a bottle of wine is the same whether it costs $5 or $500. VAT is 100 times
more on the latter

Trade pollution permits:

-These allow firms to produce a set amount of carbon
- is they produce under their set amount, they are able to sell their excess permit
- acts as an incentive to pollute less because it will increase the money they receive
- more competitive and demand for their goods will increase, thereby changing the
consumption habits of consumers toward lower- polluting goods
- firms produce over their set amount then they can buy extra permits from lower
producing companies
- however, this will increase costs and prices, price shifting consumers away from high
polluting goods.

Evaluative points
- Price signal distortion: changing prices manipulates the market and falsely
represents changes to producers and consumers
- Unintended consequences: tax impacts lower income earners more
- Excessive admin costs: the costs of implementing policies can outweigh the
benefits
- Information gaps: mean governments are misinformed and act on policy
suggestions built from inaccurate models and predictions.

Discuss the effectiveness of indirect taxation as a means of reducing cigarette and tobacco
consumption. Use a demand and supply diagram in your answer. (8)

Demand side policies

These are designed to increase AD, so the total production in the economy increases
- Monetary
- Fiscal policy

Monetary:
- Good Inflation is between (2-3)%
● In an overheating/ booming economy (inflation increases) > increase interest rate
> - encourages saving - increase cost of borrowing - reduces spending -
decreases AD - appreciates currency (negative impacts) cyclical unemployment
> less demand> less supply - higher mortgages (unless fixed rate) - worsen
wealth distribution (more debts ) -discourage new start up businesses
● In a recession > decrease interest rates > reduces cost of borrowing > increases
AD (negative impacts) increases inflation
Demand side policy diagram ^^^^

Reasons interest rates may not work:

- Banks might not pass the base rate onto consumers, which means might not have
the intended effect (lowest interest rate banks can charge)
- Even if the cost of borrowing is low, consumers might be unable to borrow
because banks are unwilling to lend
- Dependent on consumer and firm confidence (they expect it to get lower so they
wait> concerned with the economy going into recession, will not invest as is
uncertain of demand)
- Could cause inflation
Quantitative easing

Supply side policy

Supply side policy: measures designed to increase AS and the long run productive
potential of the economy
> by increasing the quality and quantity of the factors of production or increasing the
efficiency of markets
 ● Market based policies: limit/ reduce the intervention of the government and allow
the free market to eliminate imbalances
● Interventionist policies: rely on the government intervening in the market to
overcome market failure.

- privatization: market
- public sector: investment: interventionist
- deregulation: market
- improved education: interventionist
- vocational training:interventionist
- income tax cuts: market
- remove regulation/ red tape: market
- increase housing supply: interventionist
- flexible labour markets; market
- free trade agreements: market
-Reduce welfare benefits: market
-Increased health spending: interventionist

helpful>
https://www.economicshelp.org/macroeconomics/economic-growth/supply-side-policies/

policy explantation How it increases Possible negative

supply effects

privatization The transfer of Private firms have Natural monopolies

ownership from the profit motive and so become private
government to the cut costs and be monopolies (exploit
private sector more efficient consumers)

deregulation Reduction of barriers The market becomes Excess demand leading

to entry allowing new more competitive and to overcrowding of the
firms to enter the so firms have to market.
market increase efficiency
and quality of their
goods

Reduce taxes -Reduction in income -incentivizes people - might not get

tax to work harder, incentivized to work
-reduction in increasing - increased profit
corporate tax productivity might go to
- less C.O.P and so shareholders instead
can reinvest more in of getting reinvested
the business
 Encourage Increase (pull factors) Firms can fill in labor Leads to congestion
immigration > encourage shortages and so thus reducing
foreigners to enter firms can keep up standard of living >
the country and with the increasing trafic/ housing/
occupy jobs others demand infrastructure
won’t /can’t (free (prevent wage
movement of labor) inflation )

Flexible labor Reduction in the Less time lost to If labour markets are
markets power of trade unions strikes and so competitive > real
(reduce the ability to increase efficiency wages will become
go on strike- reduce very low if no one
minimum wage, open fights for higher
up to immigration)

Free trade Lower tariff barriers Enables frictionless Imports would

agreement and other obstacles trade> lower COP for exceed imports
to trade firms > improve
productivity

Reduced welfare Lower unemployment Encourages the Not everyone is

benefits benefits unemployed to take qualified for a job>
on a job increased poverty

Interventionist policies

Policy How it increases supply Possible negative effects

Improving transport and Reduce traffic (decrease the Time lag

infrastructure cost of transport for
companies)> encourages FDI

Spending in education More skilled workforce > Time lag

increase in productivity (long Opportunity cost
run) Deficit in government budget
> might demand higher
wages> cause inflation

Increased health spending Healthier more productive Time lag

workforce (less absenteeism)
Advantages: - shifting the aggregate supply curve outwards will not cause inflation due to
downward pressure on prices
- Increasing aggregate supply is an increase in production as long as it is met with an
increase of AD
- Creates sustainable economic growth as resources are generally improved
- Economic growth leads to job creation reducing unemployment
- Reducing the costs of production makes an economy more competitive in the global
market : exports will increase and improve any trade deficit
Disadvantages: - have long time lags (education> can get the education then decide to go out
of the country and work)
- Can be very costly impacting the government budget
- Government policy is weak to external shocks
- Supply side policies are rarely adopted due to the long time lags
- Some policies are unpopular with people and so governments won’t use them because
voters may oppose them

Potential policy conflicts and trade offs

- Economic growth vs. inflation: high AD> increased consumer spending>
demand pull inflation (cost push inflation: increase AS and so pressurize
resources making them scarce> increase prices/ cost of production
increases > increased prices)
- Economic growth vs. current account: domestic goods:appear more
expensive compared to foreign goods> demand decreases
Imports increase (worsen trade deficit)
Exports> fall…..imports> increase
- Economic growth vs. environment: consume space inhabited by nature>
increased fossil fuel consumption> factories
- inflation vs. unemployment : low unemployment> increased consumer
spending > demand pull inflation

Risk and uncertainty > paper 3

risk/uncertainty/shock
Eg. brexit> uncertainty
Bank issuing a start up loan> risk> exchange rates when buying currency
Coronavirus> shock> the financial crisis 2008> natural disasters
 Risk: events that can have a possibility assigned to them. Probability of
success or failure can be quantified with some accuracy
Uncertainty: refers to any possible change that is not predictable. There is
no way of calculating its likelihood (probability)
Shock: are unexpected or unpredictable events that have a major effect on
the national economy(can be positive or negative)

event Effect on Effect on firms Effect on economy Possible economic Other policies to
individuals policy to reduce reduce impact
impact

Uncertainty of brexit:
unemployment> more locals hired/ europeans will leave> reduce unemployment>
skill shortage
Increased tax revenue
-cost saving> no longer needs to contribute to the eu budget (2016 britain paid
13,1 bn)
-Immigration: huge immigration levels (eastern european romanian and
bulgarian> usually fill up the less seeked jobs)> 942000 were working in the uk
2016> problems with housing and services (pressurizes)>Less competition for
jobs> cause higher wages> might cause inflation and labor shortage would
reduce economic competitiveness and growth
-Can make free trade agreements with other countries around the world> yet will
have to trade on the terms of the world trade organization>
-Will not be part of the single market (more than 50% of uk imports go to the eu) >
also eu has trade deals between other world power like japan and canada ) it will
also reduce its negotiating power with the rest of the world> if still want to be part
of has to become an eea state: meaning they would have to contribute to eu
budget/ bound by all eu regulations without having an influence on what those
regulations say> by the economic rules and will have no say on immigration
More local goods> might be more barriers of trade with eu
Can make own choices of who to trade with > can have less tariffs
Depreciate in pound> uncertainty> weaker economy> imports more expensive
Relies so much on imports from the eu
Reduces investment> uncertainty don't know what will happen> would move into
eu instead of uk>less fdi
- Local firms can’t survive as resources are more expensive
- Movement of goods through existing supply chains is more complex costly
slow and difficult to execute
- Growth will slow down. Stagination can lead to failing living standards and
cause inequality will become more noticable. Less tax revenue> lowers gov
expenditure> possible unemployment and insufficient to create new jobs>
less strain on resources
- Possible policies to reduce impact:
- deregulate> encourage to open firms
- subsidy> because imports are expensive
- Eu people might leave> (income tax increases for foreigners)
- Reduce unemployment benefits to encourage work
- Reduce tariffs to encourage trade
- Indirect tax reduces to encourage spending(consumer uncertainty)
Risk:

- Forward currency market>:

- (insurance market)
- Allows a firm to agree to a fixed exchange rate between two currencies in
the future
- Exists for exchange rates between currencies and for the prices of
commodities
- This eliminates exchange rate risk
- Insurance: in return for a premium an insurance company will pay out the
cost of damage if a particular risk takes place.

Financial sector
Functions of the financial sector:-
- facilitate savings
 - Lend to business
- Lend to individuals
- Facilitate the exchange of goods and services transfer of funds
- Provide forward markets in currencies and commodities
- Asses creditor risk
Equity

Central bank:
Achieve government's target of 2% inflation
- To support the government's other economic aim for growth and
employment
- The central bank uses monetary policy to achieve this
- Sets the base rate> interest rate the commercial banks can follow
along the lines> there is competition between banks and so if some
don't follow> others will and will take over
Monetary policy:
Tool central banks uses to achieve government goals
- Change the base interest rate/ bank rates high interest rates slow the
economy down and low interest rates heat it up
- Adjusting the money supply has the power to issue notes and coins and
quantitative easing
MPC(monetary policy committee) : look at economy’s performance
voting> takes

Regulatory bodies in the UK

Regulatory body How do they regulate banks

Financial policy committee
FPC The FPC looks at the long term
systemic risks in the banking system as
a whole (not the risks of individual firms)
> if one bank fails, others would likely
fail too. The FPC monitors system- wide
 risks and tries to make the system safer
and more stable.

Prudential regulation authority
PRA The PRA ensures that banks operate
sensibly and do not take excessive
risks. It sets certain rules that individual
firms must follow: how much capital
banks must set aside in case of a
crash. If firms are likely to fail, the PRA
insures it happens with minimal
disruption to the wider financial system

Financial conduct authority FCA The FCA provides information

to consumers, handles complaints, and
sets rules for financial firms to follow.
(The FCA works to protect consumers
and promote competition within the
financial sector.)

Impact of the financial sector

Banking services impacts
provided

individuals saving/lending Enables them to

make big
purchases/ save
for their future
promoting
stability

firms loans Promotes

investment>
increase
economic growth

government ---- ( Idon't know) -----

Impacts of regulation on economic agents (positive)

Economic agents impacts

Customers - Reduced asymmetric

information helping customers
make more informed decisions>
customers regularly do not fully
understand info from the bank
- Improved access to banking
services (online banking)

Business customers - reduced charges if bankers are

regulated in terms of salaries
and bonuses awarded

banks - Banks not meeting minimum

standards will be removed from
the market

Tax payer - Stronger policy will prevent

taxpayers from being forced to
pay if big banks collapse

government - Savings and investments

encouraged if financial services
operating effectively. This
should also positively affect
shareholders’ returns

Impact of regulation on economic agents (negative)

Economic agents

Bank employees May not be rewarded sufficiently for their

 efforts if remuneration capped

Bank managers Bank managers might go to other

industries overseas which may cause skill
gaps. Banks themselves may move
abroad

government/ tax payer Banks can hold lower levels of capital

because of deposit insurance which could
mean if they fail taxpayers/ government
will bail them out

Regulation costs are high> the fines are also very high > increasing the cost to
customers and reduces shareholder dividends

Regulation may reduce a banks ability to gain capital from private investors which
means they will not be able to function> could choke off credit to companies and
households thus damaging economies and diminishing growth

A healthy financial sector allows people to safely save money, facilitates exchange,
promotes investment and
permits higher economic growth through sensible lending and borrowing. The UK
economy in particular is heavily
reliant on financial services as a source of economic growth. One of the key reasons
that less-developed countries
struggle to advance is because their financial institutions are weak or absent.

Regulations could have reduced risky behaviour by banks, prevent systematic failure
and protect consumers from asymmetric information thus preventing the financial crisis.

sales=revenue> all the money a firm collects

profit=all costs minused for the sales
Gross profit is the profit a firm makes after reducing the cost of the goods sold from its
revenue.

A brand carries much information about a product or company that can influence
a consumer’s decision as to whether to purchase a product or not
decrease in the value of a currency relative to other currencie
------