MCQ Exam practise

1) Explain why the hospital was built using private finance.

E: the government wanted to use its funds elsewhere in the short term

Using private finance to fund projects means that the government does not
need to pay any money up front because repayments are made over a long
time scale (25-30 years), with a high rate of interest (which may explain the
increased costs of PFI). This allows the government to use their funds in
other sectors and it also means that if there is a government budget deficit, it
will not appear to worsen in the short run.

2) Outline the reasons why the government wants to ensure there is
competition between firms.

There are many potential gains from increased market competition, for
example: a greater incentive for producers to increase efficiency and quality,
yet keeping costs down at the same time. An example from the passage is that
the merger might reduce the hospitals incentives to continue to enhance the
quality of those services over the minimum required standards.

Also, competition between firms can promote lower prices and a greater
variety of products so that consumers have higher consumer surplus along
with more choices to choose from.

However, there are suboptimal effects from competition. For example, to
achieve benefits from competition, there is an assumption that market
participants can best judge what serves their interests. However, in reality,
competition can harm society because firms may try to compete to better
exploit consumers rationality or willpower. For example, firms can use
framing effects to make a price change to be viewed as a discount, rather than
a surcharge. In the end, competition can act again consumers interest. To
combat this, government an use direct controls regulation to ensure that
firms act in the interest of consumers.

3) Discuss the likely effectiveness of the new Competition and Markets
Authority in the UK.

The new CMA should be able to achieve higher efficiency because it doesnt
need to have cases referred to it by the OFT, which can make the process
slow and inefficient. This will enable the CMA to undergo processes more
quickly and more efficiently.

The powers of the CMA are also greatly enhanced, prosecutors dont need to
prove that firms have acted dishonestly in a collusive agreement, but instead
can be prosecuted for not being open in their dealings. This means that the
CMA will be able to tackle abuses of market power more easily.

Also, the new body will have more experience and the ability to make careful
checks, with the funding to attract a high quality of competition lawyers.
This enables the CMA to adapt quickly to the changes in market situations so
can make better decisions.

However, the new CMA may pose a few problems. For example, due to the
broader scale of issues to tackle, this may reduce their efficiency and may
increase costs for the firm.

Also, being able to investigate and prosecute firms for not being open in their
dealings can cause an excessive increase in investigating unnecessary cases,
which can cause a waste of resources and drive up costs again. Moreover, it is
very difficult to regulate firms in reality because of the conflict of interests
between the regulators and private firms. An example of this is the conflict
between Ofwat and water companies. Ofwat claims that the water companies
in the UK are making supernormal profits so there needs to be an assessment
on the level of reasonable profits. However, the water companies claim that
the pipes were installed in Victorian times so they need to make enough
profits to reinvest into the construction projects.