3.6.2 Impact and limits of government intervention Quiz: Pearson Edexcel Economics A, Unit 3

The 20 questions

1. How can government intervention affect prices?

   • Prices are set only by firms and never by government policy
   • Prices are unaffected by any form of intervention at all
   • Price regulation or competition policy can lower prices for consumers in monopolised markets
   • Intervention always raises prices in every market it touches

2. How can intervention affect a firm's profit?

   • Profit regulation or price caps can reduce supernormal profit
   • Regulation always raises the firm's profits in every market
   • Regulation has no effect on profit under any policy
   • Regulation requires firms to make losses in every period

3. Intervention can improve allocative efficiency but may affect dynamic efficiency. Why?

   • Innovation is unrelated to the profits that firms earn
   • Tight price or profit regulation can reduce the funds and incentives firms have to invest in innovation
   • Regulation always increases innovation in every industry
   • Dynamic efficiency depends only on the price of the product

4. Quality standards can improve quality but may have what drawback?

   • They have no effect on cost or on choice for consumers
   • They make quality unchangeable in every market they cover
   • They always reduce quality, since firms cut corners to comply
   • They may raise costs and limit choice for consumers

5. Which is an example of how intervention can affect consumer choice?

   • Intervention always increases choice in every market
   • Choice never changes after any intervention in a market
   • Deregulation may increase choice, while restrictive rules may reduce it
   • Choice is determined only by consumers' incomes and never by rules

6. Regulatory capture occurs when:

   • The firm is taken into public ownership by the regulator
   • Regulators always protect consumers only and never the industry
   • Regulators are abolished by the firms they are meant to regulate
   • Regulators come to serve the interests of the firms they regulate, weakening regulation

7. Asymmetric information limits regulation because:

   • Firms know more about their costs than regulators do, making it hard to set the right price cap
   • Regulators always know costs exactly, so there is no problem
   • The problem only affects consumers and never regulators
   • Information is symmetric in all regulated markets by definition

8. A regulator sets a price cap too low. What is the likely result?

   • Firms may cut investment or quality, and some may exit the market
   • Firms increase investment because profits are guaranteed
   • Output rises beyond the efficient level in the market
   • Quality rises automatically as prices are cut in every case

9. Which is an example of regulatory capture?

   • A regulator publishes an annual report on its activities
   • A regulator adopts the industry's view and lobbies for weaker rules in exchange for later jobs in the industry
   • A regulator enforces strict rules after public consultation with consumers
   • A regulator sets price caps based on an independent cost audit

10. Why might a price cap cause under-investment?

    • Investment is always guaranteed by regulation in every market
    • Price caps always raise investment because they guarantee demand
    • Price caps have no effect on the costs of investment
    • If the cap is below the level needed to cover investment costs, firms may cut back on capital spending

11. Firms raise quality under regulation but also raise costs. Which concept best describes this?

    • A trade-off between quality and cost, where quality gains may be offset by higher prices
    • Quality and cost are always unrelated in every market
    • Higher quality always reduces cost for the firm
    • Quality standards never affect cost in any industry

12. Regulators face limits because of:

    • Perfect foresight about future market conditions and costs
    • Limited information, time and resources, and the risk of political pressure
    • No political influence on regulatory decisions at any time
    • Unlimited information and budgets in every regulatory body

13. Why might intervention in a natural monopoly be difficult?

    • Average cost is always below marginal cost for every firm
    • Natural monopolies have no fixed costs at all
    • Marginal cost pricing may not cover total costs, so firms may make losses without a subsidy
    • Natural monopolies operate in perfect competition

14. How can intervention reduce consumer choice?

    • Rules introduce more firms into the market automatically
    • Rules remove all product differences between sellers
    • Rules restrict which firms can supply a product, leaving consumers with fewer options
    • Rules always create greater variety of products for buyers

15. Evaluate government intervention as a response to market failure.

    • Intervention always increases welfare by definition of the term
    • It can correct failures, but costs, information problems and capture mean outcomes may be worse than the original failure in some cases
    • Intervention is never needed in any market at any time
    • Intervention always solves market failure in every case

16. Why does asymmetric information limit regulators' price setting?

    • Regulators set prices without any information at all
    • Asymmetric information only affects consumers, not regulators
    • Regulators cannot observe true costs precisely, so caps may be set too high or too low
    • Regulators know all costs and profits exactly in every market

17. A regulator estimates a firm's marginal cost at £6, but the true MC is £4. It sets a cap at £7. What is the effect?

    • Output is above the efficient level because the cap is too high
    • The cap has no effect on output in any case
    • The firm makes a loss at every output because the cap is set too high
    • The cap leaves price above true marginal cost, so output is below the efficient level and the firm earns extra profit

18. Why might government intervention reduce dynamic efficiency?

    • Innovation is unrelated to the profits that firms earn in any market
    • Dynamic efficiency depends only on the price of the product in the market
    • Regulation always increases innovation in every industry
    • Tight price or profit regulation can reduce the funds and incentives firms have to invest in innovation

19. Which is the strongest evaluative point about the limits of regulation?

    • Limits are irrelevant to the design of policy in any market
    • Regulation is always perfect and free of any limits
    • Limits only affect firms and never affect consumers at all
    • Regulators may lack information and face capture, so the benefits of regulation may be reduced in practice

20. A government wants to protect consumers and encourage investment. Which policy best balances these aims?

    • A price cap that allows a reasonable return on capital, combined with quality and performance targets
    • No regulation at all, leaving the firm unchecked
    • Nationalisation with no performance standards in place
    • A price freeze at current prices with no allowance for investment

Related quizzes

• Sizes and types of firms Quiz · 3.1.1 · 20 questions
• How businesses grow Quiz · 3.1.2 · 20 questions
• Demergers Quiz · 3.1.3 · 20 questions
• Business objectives Quiz · 3.2.1 · 20 questions
• Revenue Quiz · 3.3.1 · 20 questions
• Costs Quiz · 3.3.2 · 20 questions
• Economies and diseconomies of scale Quiz · 3.3.3 · 20 questions
• Normal profits, supernormal profits and losses Quiz · 3.3.4 · 20 questions
• Efficiency Quiz · 3.4.1 · 20 questions
• Perfect competition Quiz · 3.4.2 · 20 questions