Qualification Module Code and title

SQA in Business HP6T 47

Economic Issues: An Introduction

Student ID Assessor’s Name

01000732 Chathuri Ranaweera

Cohort Date Issued Submitted on

Oct. 2019 24th May 2021 30th May 2021

Assessment Front Sheet

Assessment 03 – Report
Assessment Title

Task
No. Learning Outcome
no
1  Explain the role of government in market failure. 1

2  Select one current government policy on either welfare, competition or 2/3/4

the environment, and accurately explain the policy selected
 Evaluate the success or failure of the policy in relation to its use within
the UK
 Identify and describe the instruments used to achieve the policy

Learner Declaration

I certify that the work submitted for this Assessment is my own and research sources are fully
acknowledged.
Student Signature:………shane gunathilake………………………… Date:…………7/6/2021……..

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Assessment Brief

Module Code and Title HP6T 47

Economic Issues: An Introduction

Qualification SQA in Business

Deadline 30th May 2021

Assessor’s Name Chathuri Ranaweera

Assessment Title Assessment 03 - Report

Assessment task instructions

You are asked to complete the following short investigative exercise by answering question
1 and one question from questions 2, 3 and 4. As a guide your responses may in total be
approximately 800 to 1,000 words in length. Relevant material collected during your
investigation may be placed in an appendix. Your response to the questions must be in your
own words and where appropriate, sources should be attributed.

Answer question 1 and one question from questions 2, 3 and 4.

1. Explain what is meant by the term ‘market failure’. In your answer you must refer to
the role of government in relation to each of the following:

 Public goods
 Merit goods
 Externalities
 Imperfect competition

Answer one question from questions 2, 3 and 4.

2. Select one current government policy on competition and:

(a) Explain the policy selected.

(b) Identify and describe the instruments used to achieve your chosen policy.

(c) Evaluate the success or failure of your chosen policy in relation to its use within the
UK.

3. Select one current government policy on welfare and:

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 (a) explain the policy selected

(b) identify and describe the instruments used to achieve your chosen policy

(c) evaluate the success or failure of your chosen policy in relation to its use within
the UK.

4. Select one current government policy on the environment and:

(a) explain the policy selected

(b) identify and describe the instruments used to achieve your chosen policy

(c) evaluate the success or failure of your chosen policy in relation to its use within
the UK

Task
No. Learning Outcome
no
1  Explain the role of government in market failure. 1

2  Select one current government policy on either welfare, competition or 2/3/4

the environment, and accurately explain the policy selected
 Evaluate the success or failure of the policy in relation to its use within
the UK
 Identify and describe the instruments used to achieve the policy

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 REPORT
Prepared by- Shane Gunathilake
Spring 21
01000732

Economic Issues
Assessment 03

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Contents
1. Market Failure.............................................................................................................................6
Public goods.....................................................................................................................................6
Merit goods......................................................................................................................................6
Externalities.....................................................................................................................................6
Imperfect competition.....................................................................................................................7
2. Government policy on competition............................................................................................8
Instruments used to achieve the policy...........................................................................................8
Success of the competition policy in relation to the use of in in the UK......................................8

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 1. Market Failure

Market failure is a situation where it shows the inefficient distribution of resources in the
market. It is the inability of producing an efficient level of output to satisfy the society wants.
Some of the reasons for market failure is listed below.

 Public goods
 Merit goods
 Externalities
 Imperfect competition

Public goods

Public goods can be known as the goods which are provided by the government. They are the
goods which are non-excludable and non-rival (ex- law, street lamps, defence). A market
system does not provide public goods as it will cause the “free riders problem” (situation
where individuals obtains the benefits without paying for them) as the market system is
motivated for profit it does not provide public goods.

Therefore the government can intervene to provide public goods free of charge or at a low
price in order to correct the market failure.

Merit goods

Merit goods are the things which create external benefits when consumed. In merit goods the
social benefit is greater than the private benefit (ex- vaccination, education). Since buyers are
focused on the private benefits rather than the social benefits, merit goods will be under
produced and under consumed as their social benefit is greater than the private benefit.

The government can intervene to provide merit goods to increase the consumption. They can
be provided free of charge or at a low price.

Externalities

Externalities are the costs or benefits which will be borne by an external party due to
production and consumption of a good or service.

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  Production
I. Negative externalities
II. Positive externalities

 Consumption
I. Negative externalities
II. Positive externalities

Positive externalities creates a benefit to the 3rd party while the negative externalities
generates costs to the 3rd party.

Goods with positive externalities are supplied or produced at a lower quantity than the
socially optimal level. In order to increase the output the government may intervene to
provide subsidies to producers. Goods with negative externalities are supplied at a higher
level than the socially optimal level. In order to avoid this government may intervene and
impose taxes on consumption and production.

Imperfect competition

Imperfect competition is the competitive market situation where there are many sellers selling
heterogeneous products opposed to the perfect competitive market. Different markets sell
products at different prices in order to gain profit. When sellers set higher prices it would
create a loss for the other producers in the market.

Government can intervene by setting a maximum price so that no party can increase the price
beyond the maximum price.

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 2. Government policy on competition

Government policy on competition are the initiatives taken to avoid and mitigate monopoly
power abuse.1998 Competition Act sought to bring the UK into line with EU competition
policy (Pettinger, 2017).

Monopoly power can be an abusive factor, which is bad for the public goods. As a result,
governments are concerned about intervening to defend consumers' interests.

The market structure where a unique good is sold with no close substitutes with barriers to
enter and exit can be termed as “monopoly market”. Policies on competition is set by the UK
government to correct the abusive market. Sections investigated in the policy.

 Collusive Behaviour
Collusion is a non-competitive, secret, and sometimes criminal agreement between
competitors to undermine market equilibrium. Collusion occurs when persons or
firms who would normally compete against one another collaborate to acquire an
unfair market advantage by working together.

 Abuse of market power

A company is said to have market power if it holds more than 40% of the market.
Firms having a dominant market position are more likely to be investigated by the
OFT. They can also look at people who have a smaller market share. The following
are examples of market power abuse:

Instruments used to achieve the policy

 Cartels and collusion are regulated. Based on the Competition Act of 1998.
 Businesses must be educated in order to comply with relevant competition laws.
 Mergers - Mergers must be reported to the CMA, which can investigate if they
believe they are in the public interest.
 Examine certain industries to evaluate if they are run in the public interest.

Success of the competition policy in relation to the use of in in the UK

 Research on grocery market

The research into the grocery sector found that big retailers were mainly free of unfair tactics.
(In April of 2008) It did, however, recommend a test to determine the amount of

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competitiveness in specific local locations. An incumbent firm may be able to gain a local
monopoly in some cases. The CMA proposed regulations to promote more local competition.

 Merger between Hungry House and Just Eat (Parker, 2017)

Because the merger of Just Eat and Hungry House does not pose a threat to competition, the
policy was effective in clearing it. Hungry House received a penalty from the CMA. The
penalty was levied by the CMA for failure to comply without reasonable cause. This
demonstrates the policy's effectiveness.

 Referral of merger between soft drink manufacturers Refresco and Cott

Because of the increased market share, the CMA was concerned that this combination would
raise prices. Because of the increased market share, the market is forced to accept any price
set by the corporation. The monopoly market takes advantage of this scenario to set
exorbitant pricing. Due to the potential of increased price rates as a result of the merger, the
competition policy/act of 1998 has begun a significant investigation.

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References
Parker, D. (2017, november). Frontier Economics. Retrieved from just eat and hungry house:
http://www.frontier-economics.com/uk/en/news-and-articles/articles/article-i2295-just-
eat-hungryhouse/

Pettinger, T. (2017, november 28). economics.help. Retrieved from

https://www.economicshelp.org/microessays/competition/#:~:text=UK%20competition
%20policy%20is%20regulation,(Competition%20and%20Markets%20Authority).&text=Based
%20on%20the%20Competition%20Act,for%20investigation%20of%20unfair%20practices.

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