Government intervention — Edexcel A-Level Economics A
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Government intervention explained
This topic examines four supply-side interventions that raise competition and contestability in markets.
Read the full explanation
Promoting small business means measures such as start-up loans, advice and lower administrative burdens, which increase the number of actual and potential rivals and erode incumbent market power. Deregulation removes or simplifies legal barriers to entry, so new firms can enter and contest incumbents' positions. Competitive tendering for government contracts opens public procurement to rival bidders, so inefficient providers lose contracts and costs fall. Privatisation transfers state-owned assets to private ownership, exposing firms to shareholder pressure and capital-market discipline.
Your focus
- Explain how promoting small business, deregulation, competitive tendering and privatisation can raise competition and contestability.
- Analyse the effect of each policy on entry barriers, prices, output and efficiency in a named market.
- Evaluate the circumstances in which these interventions may fail to increase competition or may reduce welfare.
Government intervention exam tips
Marking Points
- Promotion of small business raises the number of actual and potential competitors, increasing contestability and reducing incumbent market power.
- Deregulation lowers legal and administrative barriers to entry, allowing new firms to enter and challenge established suppliers.
- Competitive tendering for government contracts forces rival bidders to offer better value, reducing costs and improving efficiency in public procurement.
- Privatisation transfers ownership from the state to private shareholders, subjecting firms to capital-market discipline and profit incentives.
- Evaluation: each policy may fail to raise competition if scale economies, weak regulation or private monopoly persist, so outcomes depend on market conditions.
Examiner Tips
- 💡Link each policy to a specific market outcome such as lower prices, higher output or greater contestability rather than listing policies.
- 💡Use a real or hypothetical market example, such as broadband or rail, to show how the policy changes entry conditions.
- 💡Evaluate by explaining when the policy may fail, for example when scale economies make new entry unprofitable.
Common Mistakes
- Treating promotion of small business as automatically increasing competition: correction — it only raises contestability if new firms can actually enter and survive against incumbents.
- Assuming deregulation always benefits consumers: correction — removing rules can also remove safety, environmental or quality protections, so net welfare effects must be assessed.
- Confusing privatisation with deregulation: correction — privatisation changes ownership, while deregulation changes the legal rules governing entry and conduct; they are separate policies.
- Believing competitive tendering guarantees lower prices: correction — it may lower prices but can also reduce quality if contracts are awarded on price alone.