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Promoting competition and protecting suppliers and workers
Edexcel IAL Economics · WEC13 Business behaviour
As well as controlling dominant firms, governments act to increase competition and to protect suppliers and employees. Each policy has effects on prices, profits, efficiency, quality and choice.
Promoting competition
- Tax incentives and grants for small firms: lower costs help new and small firms enter and grow.
- Tax incentives and grants for foreign direct investment (FDI): tax breaks or grants attract multinational firms to set up locally, adding new competitors (and jobs) to domestic markets.
- Deregulation: removing rules that restrict entry (licences, legal monopolies), as in some airline, bus and telecoms markets.
- Privatisation: selling state-owned enterprises to the private sector. The profit motive and shareholder pressure can raise efficiency, and it raises revenue for government; but a public monopoly may simply become a private one unless competition or regulation follows.
- Competitive tendering (contracting out): firms bid for the right to provide a public service, such as refuse collection or hospital cleaning; competition for the contract lowers costs, but quality may fall.
- Trade liberalisation: cutting tariffs and quotas exposes domestic firms to foreign competition.
Protecting suppliers and employees
- Restrictions on monopsony power: codes of practice or an adjudicator for how large buyers (such as supermarkets) treat suppliers.
- Local sourcing requirements: firms must buy a share of inputs locally.
- Employment legislation: minimum wages, maximum hours, health and safety, protection from unfair dismissal.
- Barriers to entry for foreign firms: protecting domestic suppliers and jobs, at the cost of choice and efficiency.
- Nationalisation: taking firms into state ownership, to protect jobs, guarantee a service or control a natural monopoly; risks X-inefficiency and cost to taxpayers.
Impact of policies
| Policy | Prices | Efficiency and quality | Choice |
|---|---|---|---|
| Privatisation (with competition) | May fall | Productive and dynamic efficiency may rise; quality may fall if cost-cutting goes too far | Can rise |
| Deregulation | Likely to fall as entrants compete | X-efficiency rises; safety and quality concerns | Rises |
| Competitive tendering | Lower cost to government | Lower cost; quality depends on contract monitoring | Little direct change |
| Protecting domestic suppliers | Likely to rise | Less pressure to be efficient | Falls |
| Nationalisation | May be held down by subsidy | Risk of X-inefficiency; can plan long-term investment | Usually little |
Exam tip
In Section B and C answers, judge a policy by its effect on price, profit, efficiency, quality and choice, the five headings the specification lists, and say which stakeholders gain and lose.
Worked example
A government privatises its national airline and removes the licences that stopped other airlines flying domestic routes. Explain two likely effects on consumers.
- Deregulation lets new airlines enter, increasing competition.
- Fares are likely to fall and the number of routes and flight times (choice) to rise.
- But airlines may cut unprofitable regional routes, which reduces choice for some passengers.
Answer: Likely lower fares and more choice on busy routes, but fewer services on thin routes.
Check yourself
- Privatisation means
- transferring a firm from public to private ownership
- removing rules that restrict entry
- taking a private firm into state ownership
- contracting out a public service
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transferring a firm from public to private ownership. The state sells the business to private owners.
- Removing a law that gave one bus company the sole right to run services in a city is
- nationalisation
- privatisation
- deregulation
- a price cap
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deregulation. Entry restrictions are removed.
- Competitive tendering is
- private firms bidding for the contract to provide a public service
- the sale of shares in a state-owned firm
- a tax on monopoly profits
- a ban on mergers
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private firms bidding for the contract to provide a public service. Competition is for the market (the contract), not in the market.
- Which is a disadvantage of nationalisation?
- It always raises prices
- It reduces government control
- It increases the number of firms
- Lack of competition and profit motive may cause X-inefficiency
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Lack of competition and profit motive may cause X-inefficiency. Without competitive pressure, costs may rise.
- How does trade liberalisation promote competition?
- It protects domestic firms from foreign rivals
- Domestic firms face competition from imports
- It increases tariffs
- It creates state monopolies
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Domestic firms face competition from imports. Lower tariffs let foreign firms compete in the home market.
- Placing barriers to entry on foreign firms is most likely to
- increase competition
- lower prices for consumers
- increase efficiency of domestic firms
- protect domestic jobs but reduce choice and raise prices
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protect domestic jobs but reduce choice and raise prices. Less competition protects producers at consumers' expense.
- Explain one reason why privatisation may not lower prices for consumers.
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If a state monopoly becomes a private monopoly without competition or regulation, the firm can use its market power to raise prices to maximise profit for shareholders.. The structure of the market may not change.
Sources
Last updated 8 November 2026. Spotted a mistake? Tell us.