Competition policy: Benefits and limits of competition

Overview

Recall questions on The benefits and limits of competition, Privatisation and its effects, Public-private partnerships, deregulation and renationalisation.

What you need to know

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Questions from this subtopic

Each one with the model answer underneath.

1. 1

   State four benefits that competition can bring to an economy.

   Model answer

   Lower prices, greater efficiency, more innovation, and increased consumer choice.

2. 2

   Why might competition not always be desirable in industries with significant economies of scale?

   Model answer

   A natural monopoly can achieve lower average costs than multiple competing firms, so competition would raise costs and prices.

3. 3

   Why is contestability considered desirable even when actual competition is limited?

   Model answer

   The threat of entry disciplines incumbent firms to behave competitively, keeping prices low and efficiency high.

4. 4

   What is a potential drawback of intense competition for long-term innovation?

   Model answer

   Competition may reduce firms' ability to earn supernormal profits needed to fund research and development.

5. 5

   Define privatisation.

   Model answer

   The transfer of ownership of assets or enterprises from the public sector to the private sector.

6. 6

   How might privatisation increase competition in a previously state-controlled industry?

   Model answer

   By breaking up state monopolies and allowing multiple private firms to enter the market.

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