How governments regulate competition Edexcel International GCSE Economics revision
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In plain words
Left alone, big firms may squeeze their customers: fixing prices together, buying up their rivals, or simply charging what they like. Governments set up bodies, often called competition authorities or regulators, to stop this.
The aim is to keep markets working in the interests of consumers.
5 things to know
- Governments regulate competition to promote competition, limit monopoly power, protect the interests of consumers, and control mergers and takeovers.
- A proposed merger can be investigated and blocked if it would leave too little competition.
- Firms that collude to fix prices can be fined heavily.
- A monopoly that cannot be broken up, such as a water supplier, can have its prices capped by a regulator and be set standards of service.
- Removing barriers to entry, for example by ending a legal monopoly, lets new firms join a market.
Tips and tricks
- Match the action to the problem. A merger that would create a monopoly: block it. A cartel: fine it. A monopoly that must stay: cap its prices.
- Regulation has costs too: investigations take time and money, and firms may pass the cost of complying on to consumers.
It lands in your notebook with its questions as flashcards.
How governments regulate competition: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
Which is an aim of government regulation of competition?
Regulation is meant to stop firms abusing their power over customers.
A competition authority finds that four firms have agreed to fix prices. What is it most likely to do?
Price fixing is collusion, and it is punished with fines.
Why might a government stop two large firms from merging?
One dominant firm could raise prices and reduce choice.
How can a regulator control a monopoly that cannot be broken up?
A price cap limits what the monopoly can charge its customers.
Which would promote competition in a market?
Lower barriers let new firms compete with existing ones.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 8 marks. Write your answers on paper, then check them.
How governments regulate competition
Edexcel International GCSE Economics 4EC1 · 8 marks · papermunch.org
Name ______________________________ Date ______________
State two reasons why governments regulate competition.[2]
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Any two of: to promote competition, to limit monopoly power, to protect consumers, to control mergers and takeovers.
Explain why a government might block a merger between the two largest supermarkets in a country.[3]
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The merged firm would have a very large market share and little competition. It could raise prices and reduce choice, which would harm consumers.
Explain how a price cap on a water company protects consumers.[3]
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The water company is a monopoly, so customers cannot switch supplier. A legal limit on the price it can charge stops it using that power to charge very high prices.
Answers: How governments regulate competition
- 1. Any two of: to promote competition, to limit monopoly power, to protect consumers, to control mergers and takeovers.
- 2. The merged firm would have a very large market share and little competition. It could raise prices and reduce choice, which would harm consumers.
- 3. The water company is a monopoly, so customers cannot switch supplier. A legal limit on the price it can charge stops it using that power to charge very high prices.