AQA A-level Economics: Competition, ownership, regulation and government failure (7136) – Revision Notes

These notes condense the AQA AS and A-level Economics specification (version 1.3, 29 June 2022, first taught from September 2015), sections 3.1.8.7, 3.1.8.8 and 3.1.8.10 (printed as 4.1.8.7, 4.1.8.8 and 4.1.8.10 in the combined PDF). The study guide explains each point with worked examples. After revising, test yourself with the practice questions. Use the course hub, the printable checklist and the free 10-minute diagnostics to find gaps. All firms and figures here are invented.

Key definitions

Term	Meaning
Competition policy	Government action to keep markets competitive and stop the abuse of market power
Cartel	Firms agreeing to fix prices, share markets or limit output
Abuse of dominance	A dominant firm using its power to harm rivals or consumers, such as predatory pricing
Public ownership	The state owns and runs a firm or industry
Privatisation	Transfer of a state-owned firm to private owners
Regulation	Rules set by government or a regulator
Deregulation	Removal or reduction of rules, often to ease entry
Regulatory capture	A regulator that ends up serving the regulated industry, not the public
Government failure	Intervention that leads to a misallocation of resources
X-inefficiency	Costs above the minimum possible because of weak cost pressure

Competition policy in one page

UK principles. The CMA is the UK body. Policy has four strands: ban anti-competitive agreements, stop abuse of a dominant position, review mergers and investigate markets. Detailed law is not required.

EU awareness. Similar rules on cartels and dominance, review of large mergers with an EU dimension and limits on state aid.

Remedies. Fines (capped as a share of turnover), breaking up or selling parts of a firm, behaviour orders, personal sanctions.

Benefits	Costs
Lower prices, wider choice, better quality	Cost of enforcement and compliance
Less collusion and deadweight loss	Wrong decisions in either direction
Contestable markets and innovation	Delays, uncertainty, deterred efficient mergers

Method for judging a merger

1. Describe the market and the shares of the merging firms.
2. Say how competition changes: price, entry, rivals’ response.
3. Weigh cost savings (economies of scale) against higher prices and less choice.
4. Decide whose welfare counts: consumers only, or total surplus.
5. Conclude and state the evidence that would change your view.

Concentration check. Market shares of 28, 22, 18, 12, 10, 10 give a three-firm concentration ratio of 28 + 22 + 18 = 68%. If the 18% and 12% firms merge, the combined firm has 30% and the ratio is 30 + 28 + 22 = 80%. A rise of 12 points does not prove harm. You still need entry barriers and efficiency evidence.

Deterrence check. Gain £30 million, fine £8 million, chance of detection 10%. Expected fine = 0.1 × 8 = £0.8 million. The fine is far too small to deter, so detection chance and fine size both matter.

Public ownership and privatisation

Idea	Chain of reasoning
Natural monopoly	High fixed costs, so one firm is cheapest. Competition duplicates cost. State ownership can price near marginal cost and avoid private monopoly profit.
Externalities and merit goods	Private owners ignore external benefits, so output is too low. The state can provide it.
X-inefficiency	No profit motive or takeover threat, so costs drift up.
Soft budget	Losses are covered by taxpayers, so managers face no discipline.
Efficiency from privatisation	Shareholders and takeover threat press managers to cut cost, which raises profit.
Privatised monopoly	Efficiency gains may go to owners as higher prices if no regulation or competition exists.

Sale price test. A state firm earns £15 million profit a year. At a 5% discount rate its value as a permanent income is 15/0.05 = £300 million. A sale at £240 million loses the state £60 million of value. Remember that this assumes the same profit continues and that the state could not do better itself.

UK application. The UK privatised several utilities in the 1980s and 1990s and created independent regulators for the ones with natural monopoly networks. The specification asks you to assess application in the UK and the effects on economic performance, so use context if the question supplies it.

Regulation and deregulation

Tools. Price caps, quality and service standards, limits on profit, rules on entry and ownership.

Price cap. Permitted price change = inflation − X. Check: inflation 3%, X = 1.5, so permitted change is +1.5%. A price of £50 becomes 50 × 1.015 = £50.75.

Regulation: strengths	Regulation: weaknesses
Limits monopoly pricing	Regulator lacks cost information
Sets safety and quality	Compliance and administrative costs
Mimics competition	Tight caps reduce investment

Deregulation: strengths	Deregulation: weaknesses
Easier entry, more competition	Safety and quality risks
Lower business costs	Market power returns
Fewer regulator costs	Informed buyers needed

Regulatory capture checklist. Causes: information dependence, revolving door, lobbying, concentrated benefits for firms against scattered consumers. Effects: weak caps, entry barriers, higher prices. Safeguards: independence, transparency, cooling-off periods, appeals, several information sources.

Government failure

Source	Short chain
Inadequate information	Wrong tax or subsidy rate, so output moves past the optimum
Conflicting objectives	A government wanting revenue and low prices sells a monopoly at a high price
Administrative costs	Setting up, monitoring and enforcing use resources, which may exceed benefits
Distortions	Subsidies or protection keep inefficient firms alive or move prices away from marginal cost
Unintended consequences	Black markets, cross-border buying, supplier capture of subsidy

Net benefit check. A grant scheme gives 50,000 grants of £400, which costs £20 million, and administration costs £3 million. Of the households, 40% would have acted anyway (deadweight), so 30,000 act because of the grant. Each such action gives a social benefit of £600, so the benefit is 30,000 × 600 = £18 million. Net = 18 − 23 = −£5 million. The scheme misallocates resources even though the aim was sound.

Evaluating. Government failure does not prove that markets should be left alone. Compare realistic magnitudes of market and government failure, flexibility and reversibility of the policy, time lags and the quality of information.

Quick self-test

1. Define regulatory capture.
2. State two strands of UK competition policy.
3. Inflation is 3% and X is 1.5. By what percentage may price rise, and what is the new price if it was £50?
4. A state firm earns £15 million a year. It is sold for £240 million. At a 5% discount rate, how much value is lost?
5. Shares are 28, 22, 18, 12, 10, 10. Find the three-firm concentration ratio before and after the 18% and 12% firms merge.
6. Give one argument for keeping a natural monopoly in public ownership.
7. A cartel gains £30 million. The fine is £8 million and detection chance is 10%. Find the expected fine and comment.
8. Name two sources of government failure and link each to misallocation.
9. A scheme costs £20 million plus £3 million administration. It leads to 30,000 extra actions worth £600 each. Find the net benefit.
10. Why might privatising a monopoly raise prices?

Answers

1. Capture: a regulator that, over time, favours the firms it oversees rather than consumers, typically through reliance on their data or staff moving between the two.
2. Any two of: banning anti-competitive agreements, preventing abuse of dominance, reviewing mergers, investigating markets.
3. 3 − 1.5 = 1.5%. New price = 50 × 1.015 = £50.75.
4. 15/0.05 = £300 million, so 300 − 240 = £60 million lost.
5. Before 68%, after 80%.
6. Competition would duplicate fixed costs, and public ownership can price near marginal cost while keeping profit out of private hands.
7. 0.1 × 8 = £0.8 million, much less than £30 million, so it will not deter. Raise the detection chance and the penalty.
8. For example, inadequate information gives a wrong tax rate and output moves away from the optimum. Administrative costs use resources that exceed the benefit.
9. 30,000 × 600 = £18 million benefit. Cost £23 million. Net = −£5 million.
10. The private owner has market power and a profit motive. Without competition or a cap it raises price and cuts output.

Where marks are usually lost

• Defining competition policy without naming the tools (cartels, dominance, mergers, market investigations).
• Giving only benefits or only costs of a policy. A balanced judgement needs both.
• Writing “privatisation increases efficiency” with no chain and no mention of competition or regulation.
• Confusing regulation with deregulation, or treating a price cap as a price control that sets an exact price.
• Saying regulatory capture is bribery rather than influence and information dependence.
• Listing sources of government failure with no link to misallocation of resources.
• Concluding that government failure means no intervention. Compare it with market failure.
• Using real figures from memory. Use only the data provided in the question.

Official syllabus

AQA, AS and A-level Economics specification (7135 and 7136), version 1.3, 29 June 2022, first teaching from September 2015: sections 3.1.8.7, 3.1.8.8 and 3.1.8.10 (printed as 4.1.8.7, 4.1.8.8 and 4.1.8.10 in the combined PDF).