4.1.8.8 Public ownership, privatisation, regulation and deregulation of markets Quiz: AQA Economics, Unit 1

The 20 questions

1. An argument for public ownership of a firm in a natural monopoly is that:

   • Public ownership guarantees that the firm earns supernormal profit each year, which is then used to cut taxes for households.
   • The government can set prices and output in the public interest, rather than leaving a private monopolist to maximise its profit.
   • Public ownership always increases competition, because state firms must compete with private firms for every customer in the market.
   • Public ownership removes the need for any investment, because the state always funds the firm's capital from its current budget.

2. An argument against public ownership is that:

   • Public ownership always lowers costs, because managers in state firms are paid less and so the firm operates more cheaply.
   • Lack of competitive pressure may reduce incentives to cut costs and innovate, leading to inefficiency in state-owned firms.
   • Public ownership increases competition, because state firms must enter every market and so drive private firms out of business.
   • Public ownership always raises prices above the level set by any private monopolist, because the state seeks maximum revenue.

3. Which is an argument in favour of privatisation?

   • It guarantees that the state retains full control over every decision the firm makes about its products and its staff.
   • It removes all market failure from the industry, because private firms never make decisions that affect third parties at all.
   • It may introduce competitive pressure and private investment, which can improve efficiency and reduce the burden on public finances.
   • It always reduces the price of the privatised good, because private firms are required by law to charge the lowest price possible.

4. Which is an argument against privatisation of a natural monopoly?

   • The private firm always creates more competition, because it must split the monopoly into several smaller rivals after sale.
   • The private firm never invests, because a natural monopoly has no need for any capital equipment or upgrades to its network.
   • The private firm may exploit its monopoly power by charging high prices, and the public interest may be ignored in its decisions.
   • The private firm always lowers prices below marginal cost, because it wishes to attract as many customers as possible in the market.

5. Which is an argument in favour of regulating a market?

   • Regulation can limit the exercise of monopoly power and protect consumers, for example by capping the prices charged by a dominant firm.
   • Regulation always removes the need for competition, because regulated firms are protected from all rivals by law in the market.
   • Regulation always increases the number of firms in the market, because it lowers the cost of entry for new businesses in every case.
   • Regulation always raises the output of the firm to the level of maximum profit, so that consumers benefit from higher supply.

6. Which is an argument in favour of deregulation?

   • Removing rules eliminates all risk of market failure in every industry, because the market always corrects its own errors.
   • Removing unnecessary rules can reduce compliance costs and encourage new entry and competition in previously restricted markets.
   • Removing rules guarantees that consumers always receive the highest quality goods, because firms have no reason to compete.
   • Removing all rules increases the market power of incumbent firms, because they face no restrictions on their pricing decisions.

7. Which is an argument against deregulation?

   • It always reduces competition, because removing regulations forces firms to merge into larger units that dominate the market.
   • It always reduces the number of firms, because unregulated markets are closed to entrants who lack the required licences.
   • It always raises prices for consumers, because removing rules means firms must charge the highest price to recover their costs.
   • It may lead to market failure, such as weaker consumer protection or safety standards, if firms are not properly controlled.

8. What is regulatory capture?

   • When a regulator comes to act in the interests of the industry it is supposed to regulate, rather than in the public interest.
   • When a regulator sets prices so low that every firm in the industry makes a loss in each period of trading in the case described.
   • When a regulator takes ownership of an industry, so that the state directly runs every firm that it previously regulated.
   • When a regulator captures the consumers' surplus, which is then transferred to the government as tax revenue.

9. Which factor is most likely to cause regulatory capture?

   • Strict legal rules set by parliament, which limit the discretion of regulators in deciding individual cases in the market.
   • Close and long-running relationships between regulators and the firms they oversee, including the movement of staff between them.
   • A large number of consumer complaints, which keeps regulators focused on the interests of the public they serve over the period concerned.
   • Public scrutiny of regulatory decisions, which makes regulators more accountable to consumers and to parliament.

10. A privatised utility is subject to a price cap set by a regulator. What is the main purpose of the cap?

    • To ensure that the firm charges the same price as its competitors, so that the market has a single price in each period.
    • To guarantee the firm earns supernormal profit in every year of its operation, so that it can invest in new equipment.
    • To limit the firm's ability to exploit its monopoly power and pass lower costs or efficiency gains on to consumers.
    • To prevent any new firm from entering the market, so that the incumbent keeps its monopoly position without rivals.

11. Which statement about public ownership is most accurate?

    • It allows the state to pursue objectives such as universal service, but may weaken incentives for efficiency without competition.
    • It always improves the quality of goods, because public employees are more motivated than private employees in every case.
    • It always removes the need for competition policy, because state-owned firms are never subject to competition law.
    • It always produces the lowest prices in every market, because state firms have no need to earn any profit at all in the case described.

12. Which is a likely effect of privatising a firm in a competitive market?

    • The firm loses all its customers, because consumers prefer state provision to private provision for every good in the economy.
    • Output always falls to zero, because private firms cannot compete with the state in any market where they operate in the economy.
    • Prices always rise sharply, because private firms must earn profit and so they always charge more than state firms in any market.
    • Changes in efficiency and prices may be small, because competition already disciplines the firm's behaviour without ownership change.

13. A government deregulates the bus market, allowing any operator to enter routes. What is the most likely short-run outcome?

    • Consumer choice falls, because deregulation allows only one operator to serve each route in the market at any time in the case described.
    • Bus fares rise sharply on all routes, because new operators must charge the highest possible fare to recover their costs.
    • All bus services are withdrawn, because deregulation requires every operator to leave the market once it has entered it.
    • More operators enter popular routes, which may increase service frequency and competition on those routes in the short run.

14. Which evaluation best challenges the case for privatisation?

    • Privatisation has no effect on efficiency, because ownership of a firm never influences its costs or its decisions in any market.
    • Privatisation always reduces competition, because private firms are prohibited from entering any market in the economy.
    • Privatisation may raise efficiency in competitive markets, but in natural monopolies it may only replace state control with private power.
    • Privatisation always increases welfare in every sector, because private ownership removes every type of market failure at once.

15. What is the main advantage of a regulator being independent of government?

    • It can ignore consumers entirely, because regulators are free to set policy without any public accountability at any point.
    • It can guarantee that every firm earns supernormal profit, because independence allows regulators to protect firms from competition.
    • It can make decisions based on evidence and the public interest, which helps to reduce political interference in regulation.
    • It can remove all market failures, because independent regulators never make mistakes in their decisions about any market.

16. Which is the best reason why deregulation may not always raise welfare?

    • Deregulation always eliminates competition, because firms that are free from rules merge to avoid any rivalry in the market.
    • Deregulation removes all externalities, so welfare cannot fall whatever the result of the reform in the market or the economy.
    • Deregulation always lowers the number of firms in the market, so consumers always face higher prices after any reform.
    • Deregulation can increase risks such as unsafe products or market power if remaining competition is weak in the market.

17. A public corporation is required to break even over the year. What does this imply for its objective?

    • It aims to produce where marginal cost is zero, so that it always earns a surplus on every unit it sells in the market.
    • It aims to cover its costs from revenue rather than maximise profit, which may lead to a break-even price above marginal cost.
    • It aims to maximise the profit that it can return to the Treasury each year, by setting the highest price consumers will pay.
    • It aims to set the price equal to zero, so that all of its output is given free of charge to users in every period in the case described.

18. Which statement describes the difference between regulation and nationalisation?

    • Regulation transfers ownership of the firm to the state, while nationalisation controls the pricing decisions of private firms.
    • Regulation removes the need for prices, while nationalisation sets prices for every product sold in the economy in each year.
    • Regulation and nationalisation are identical policies, because both involve the state directly owning and running the firm concerned.
    • Regulation controls the behaviour of private firms, while nationalisation transfers ownership of the firm to the state.

19. Why might a government choose to regulate rather than nationalise a natural monopoly?

    • Regulation may keep the benefits of private management while limiting monopoly pricing, though it requires effective oversight.
    • Regulation is always cheaper than any other policy, because regulators are paid nothing for their work and need no resources.
    • Regulation prevents the firm from ever earning profit, because regulated firms are required to operate at zero profit in every year.
    • Regulation always guarantees lower costs than nationalisation, because private firms never make any errors in running a network.

20. Which of the following is a likely cost of regulation?

    • Higher competition in every market, because rules always remove entry barriers for all firms that wish to operate in the economy.
    • Compliance costs for firms, which may be passed on to consumers as higher prices or may deter small firms from entering the market.
    • Lower prices in every market, because regulation always forces firms to sell at marginal cost to every consumer in the economy.
    • A rise in the number of firms entering the market, since regulation guarantees each new entrant a profitable share of demand.

Related quizzes

• Economic methodology Quiz · 4.1.1.1 · 20 questions
• The nature and purpose of economic activity Quiz · 4.1.1.2 · 20 questions
• Economic resources Quiz · 4.1.1.3 · 20 questions
• Scarcity, choice and the allocation of resources Quiz · 4.1.1.4 · 20 questions
• Production possibility diagrams Quiz · 4.1.1.5 · 20 questions
• Consumer behaviour Quiz · 4.1.2.1 · 20 questions
• Imperfect information Quiz · 4.1.2.2 · 20 questions
• Aspects of behavioural economic theory Quiz · 4.1.2.3 · 20 questions
• Behavioural economics and economic policy Quiz · 4.1.2.4 · 20 questions
• The determinants of the demand for goods and services Quiz · 4.1.3.1 · 20 questions