Transcript Chapter 4_Specification quiz with answers

Quiz 2: Specification
linked to broadcast media industry
This quiz requires knowledge of the case study, the
Unit 4b specification and some relevant facts about
the broadcast media industry
What market failure means 1 of 2
1. Is broadcast media a merit or demerit or public good – or
none of these?
It depends on the type of broadcasts. Those with (for
example) an educational content count as merit
goods; but too much general viewing has an adverse
health impact and counts as a demerit good.
2. Will the free market allocation of resources to the
broadcast media industry be too small, too great or optimal?
It could be either, but will probably not contain
enough of a ‘public service’ nature.
What market failure means 2 of 2
3. What other categories of market failures are there?
1. Monopoly power – in the absence of
competition, the free market allocates too few
resources to the industry.
2. Information asymmetry – consumers make poor
buying choices because they know less about what
they are buying than the producers.
3. Inequality – free markets generate a much higher
degree of inequality than most people find
acceptable.
What externalities are and how they
affect an economy 1 of 2
4. If the production or consumption of a good leads to
damage to the environment in its widest sense e.g. climate
change, increased noise, worse health or the closure of other
businesses – then these are known as ...
External costs.
5. Equally, if the production or consumption of a good leads
to benefits for anyone other than the buyer or the seller,
then these are known as ...
External benefits.
What externalities are and how they
affect an economy 2 of 2
6. Over what time period do external costs occur?
Any – biased broadcasting might unduly influence an
election result, the adverse health consequences of
watching too much TV could take decades to emerge.
7. Why is it difficult to measure the size of external costs?
Since no-one is paying for them directly, it is extremely
difficult to quantify them. For localised externalities like
a new polluting factory, changes in house prices provide
an estimate.
To what extent are externalities
acceptable? 1 of 2
8. Is the best way of dealing with demerit goods to stop
producing them altogether to eliminate the external costs
they generate?
No: demerit goods also produce very considerable
benefits which need to be factored into the equation.
9. Then by what amount should production be reduced?
By the amount that production would fall if
consumers had to pay for the full cost, both private
and external, that the good generates.
To what extent are externalities
acceptable? 2 of 2
10. What is cost benefit analysis?
The procedure by which a government decides
whether to go ahead with a project after factoring in
all the costs and benefits, both private and external.
11. How does it differ from a private company weighing up
an investment decision?
A private company will only consider its private
costs, and the private benefits of potential customers
as reflected in potential revenues.
What can the government do about
external costs? 1 of 4
12. What are the three main methods mentioned?
Legislation/regulation, taxation & tradable permits.
13. Mention any 4 methods of regulation used to control the
broadcasting of unsuitable material
 Every broadcaster has to have a licence from Ofcom
 Video unsuitable for children should not be broadcast before
the 9 pm ‘watershed’
 Every broadcaster has to abide by the convention of political
impartiality in its news programs
 Advertisements have to abide by the ASA (Advertising
Standards Authority) code
What can the government do about
external costs? 2 of 4
14. How effective is regulation of the broadcast media industry?
By its very nature, broadcast media is a very public
industry – subject to scrutiny by regulatory agencies
but also by the press and the viewing public. British TV
has a good claim to be among the world’s best.
15. Is tax used to control the external costs of broadcast media?
No: while the Licence Fee is a tax, because it is a ‘flat
rate’ tax it does not reduce the number of hours
viewed.
What can the government do about
external costs? 3 of 4
16. Illustrate the impact of an increase in the Licence Fee on the
amount of television watched by a typical household, using a
Supply/Demand diagram
D
S1 andS2
Q1 & Q2
Quantity
The typical household retains
their TV licence. Since the cost
of watching another program
(i.e. the marginal cost) is still
zero, viewing hours are not
affected.
3.9
What can the government do about
external costs? 4 of 4
17. How effective is the watershed as a means of reducing the
external costs associated with watching TV?
It is less effective than it was, due to the growing
popularity of Video on Demand but it still protects
children engaged in unplanned viewing.
18. How effective are Ofcom’s fines in dealing with ‘adult’
content?
Probably not that effective, given that they are
normally only a few thousand pounds.
Why regulation is needed
1 of 3
19. What is a cartel?
An arrangement between companies in the same industry
to reduce competition e.g. through raising prices
together or not competing with each other. They are
illegal.
20. Why is a cartel another example of market failure?
Any monopoly or monopoly-like arrangement reduces
output in the industry below its optimal level, since
prices are artificially raised. Also, monopoly profits
spread income more unequally.
Why regulation is needed
2 of 3
21. Give an example of a restrictive practice from the
broadcast media industry.
The exclusive sale of premier league football to just
one provider (BSkyB) for many years after 1992.
22. What is the normal impact of any restrictive practice on
price and competition?
Competition is reduced and prices therefore rise.
This is why most restrictive practices are not allowed
– their effect is like that of a cartel.
Why regulation is needed
3 of 3
23. What impact do restrictive practices have on businesses
and the consumer.
The consumer loses, paying more for less choice.
Established businesses gain, while potential new
entrants may be frozen out.
24. Why are there natural monopolies in the broadcast media
industry?
The zero marginal cost to broadcasters of adding
customers means that the more customers someone
like BSkyB has, the lower their cost per customer.
What the government does
1 of 5
25. What are the four main roles of the OFT in its mission to
‘make markets work well for consumers’?
 Enforce consumer protection law along with Local
Authority Trading Standards
 Investigate possible criminal cartels
 Investigate potential mergers, referring them to the
Competition Commission (CC) if it thinks further
investigation is needed
 Conduct studies across whole markets, again
referring the matter to the CC if necessary
What the government does
2 of 5
26. Why did the OFT insist in 2005 that the joint venture TV
Eye (jointly owned by ITV, C4 & C5), which sells TV advertising,
abandon its joint terms & conditions for advertisers?
Because it took the view that this reduced competition
between ITV, Channel 4 and Channel 5.
27. Why is News International’s current proposal to increase its
ownership of BSkyB from 39% to 100% likely to be challenged
either by the OFT or by Ofcom?
Both because of traditional competition concerns, and
also because of the political and social requirement to
maintain a diversity of media ownership.
What the government does
3 of 5
28. What are the two main roles of the Competition
Commission (CC)?
 To decide whether individual mergers and
acquisitions should be allowed
 To investigate markets, to see if they are working in
the public interest
29. Why did the CC allow the two main ITV franchisees
(Carlton & Granada) to merge in 2002?
Because of the increased number of competitors in
the market for television, both from satellite, cable,
terrestrial and online providers.
What the government does
4 of 5
30. What are the two main roles of the EU Commission
(Competition) under the 1997 EC treaty?
 Article 81 – to prohibit agreements between two
firms which restrict competition
 Article 82 – to prohibit firms with a dominant
position from abusing that dominance
31. Why did the EU issue general guidelines for Public
Service (PS) broadcasting in 2009?
To prevent PS broadcasters leveraging their
privileged access to Licence Fees into new media
ventures outside their PS obligations.
What the government does
5 of 5
32. What are the typical defences available to BSkyB when
faced with accusations of abusing monopoly power, for
example in the transmission of sporting events?
First, BSkyB can point to the enormous risks it took
in the early 1990s,making substantial losses while
setting up its satellite channels. These risks entitle it
to an above-average return on its investments.
Second, the rapid development of online video
channels indicates that it faces an array of new
competitors, such as YouTube.
The effects of these policies and the
implications for business 1 of 2
33. Government attempts to correct market failure may
themselves fail, resulting in ‘government failure’. Why?
Governments themselves have enormous monopoly
power, and this – as so often – leads to great
inefficiencies. With respect to the media, its vested
interest in how news is presented makes it very
difficult for the Government to come to decisions
about (for example) the future of the Licence Fee
from a purely objective angle.
The effects of these policies and the
implications for business 2 of 2
34. What is the impact of regulation on business costs?
Regulation will increase business costs e.g. ensuring
that news programs are impartial, giving fair access
to a range of views and political representatives.
35. What is the impact of regulation on business
competitiveness?
It may make businesses more competitive in an
international setting if their standards are higher. For
example, the BBC’s reputation for impartiality lies at
the heart of its global success.
What the government does
1 of 5
36. Decisions by government with respect to its spending (G)
and taxation (T) are known as ......?
Fiscal policy.
37. Decisions by government with respect to interest rates (r)
and the money supply (MS) are known as ......?
Monetary policy.
38. If either fiscal or monetary policy are used to shift
Aggregate Demand, this is known as
Demand management.
What the government does
2 of 5
39. If AD is shifted out [in], this is known as
Expansionary [contractionary] policy.
40. Examples of expansionary fiscal [monetary] policy are:
Reducing T or increasing G [reducing ‘r’ or
increasing MS e.g. through the Bank of England’s
Quantitative Easing program since March 2009].
41. Examples of contractionary fiscal [monetary] policy are:
Increasing T or reducing G [increasing r or reducing
MS].
What the government does
3 of 5
42. Demand management is currently carried out using ...
Monetary policy.
43. The Bank of England uses interest rates as its tool of
monetary policy to hit what target?
The annual inflation target given to it by government,
currently 2% per annum.
44. What policy stance has the Bank adopted recently?
Expansionary – ‘r’ has been cut from 5% in April ‘08
to 0.5% from March ’09, where it has stayed. Then
Ms has been increased by £200 billion though the
Quantitative Easing program.
What the government does
4 of 5
45. Explain, using the example of a broadcaster, how low interest
rates might expand AD
Broadcasters pay less interest on their (variable rate)
loans, so can borrow more to spend on setting up new
Video on Demand (VOD) websites.
46. Decisions aimed at increasing the productive capacity of the
economy are known as ...
Supply-side policy.
What the government does
5 of 5
47. If productive capacity is to increase what must happen to
a country’s factors of production (inputs)?
The country needs either more inputs (land, labour,
capital and entrepreneurship) or for each unit of
input to become more productive.
48. Why do low interest rates increase an economy’s
productive capacity?
To take the example of our broadcaster, once the
VOD website has been set up, it will be able to
increase the revenue it receives from customers.
The effectiveness of government action
1 of 3
49. Name two recent global shocks which have made it difficult to
control the UK economy.
Sudden large increases in raw materials prices in 2007. A
global collapse in the banking sector in 2008.
50.Why do time-lags make it difficult to control the economy?
The impact of a change in interest rates takes 1-2 years to
feed through to a change in AD. So UK inflation went way
over target in 2008 when global commodity prices
surged.
The effectiveness of government action
2 of 3
51. Why is there a short-term trade-off between
unemployment and inflation?
Expansionary demand management reduces
unemployment but increases inflation – and vice
versa for contractionary demand management.
52.Expansionary [contractionary] policy will, other things
equal, make short-term business turnover and profits go ...
Up [down].
The effectiveness of government action
3 of 3
53. If the UK suffers a worse recession than our trading
partners, what impact will this have on our international
competitiveness?
We will tend to become more competitive. The
recession gets rid of our least efficient firms. If there
is also a decline in the sterling foreign exchange rate
then this will make our goods more competitive on
price.
Why the government redistributes
wealth (and income) 1 of 4
54. Why is great inequality of income normally considered a
market failure?
Because electorates make a value judgement that they
want less inequality. This has been particularly
noticeable in September 2010, when all parties have
declared their wish to protect the poorest from the
coming public expenditure cuts.
55.List 4 causes of inequality within any economy.
Genetic endowment, educational opportunity, level of
inherited wealth, chance, personal career choice, level of
personal responsibility, health, discrimination (any 4).
Why the government redistributes
wealth (and income) 2 of 4
56. The situation where earning more money means you take
home the same or less in post-tax income plus benefits is known
as ...
The poverty trap.
57.Mention two benefits of inequality to a business.
A greater market for luxury goods, and cheaper
employees.
58. Mention one drawback of inequality to a business.
Specific geographical areas may be trapped in a cycle of
deprivation.
Why the government redistributes
wealth (and income) 3 of 4
59. Why might the redistribution of income and wealth lead
to greater economic welfare?
An extra pound gives more benefit to a poor person
than a rich one, so redistributing from rich to poor
increases overall benefit.
60. Why might the redistribution of income and wealth lead
to less economic welfare?
It could reduce incentives for poor and rich alike to
try hard (e.g. due to the Poverty Trap), creating an
Equity/Efficiency trade-off.
Why the government redistributes
wealth (and income) 4 of 4
61. Mention one business benefit of redistributive policies.
There will be a lot of government contracts to win
e.g. refurbishing schools and housing, and supplying
an enlarged government sector with goods and
services.
62. Mention one business drawback of redistribution.
Redistributive policies invariably mean higher
taxation, and some of this will fall on the business
community.
The implications for business of
government regulation 1 of 3
63. As government seeks to encourage the national roll-out of
superfast broadband, what impact will this have on the TV
and video industry?
The industry will expand, as a better service becomes
possible. In fast-moving environments like this,
some companies will gain and others lose.
64. Why might the prohibition on project Kangaroo increase
competitiveness?
The main providers of UK video content (BBC
Worldwide, ITV and C4) will have to develop their
VOD libraries in competition with each other.
The implications for business of
government regulation 2 of 3
65. How does regulation pose a threat to some businesses?
Those whose business model is linked to a targeted
characteristic e.g. the BBC’s future relies heavily on
retaining its exclusive access to the Licence Fee.
66. How might regulation encourage innovation?
It may encourage the search for new business models
e.g. Ofcom’s decision to compel BSkyB to sell Sky
Sports to other TV networks at a price determined
by Ofcom may well lead to more networks offering a
more creative mix of programming.
The implications for business of
government regulation 3 of 3
67. What would be the impact on international trade of the
removal of the current UK requirement that TV news is
impartial?
It might improve UK exports of news programs in
the short-term, but damage the brand in the longterm.
68. What would be the impact on international trade of more
marketing restrictions on UK-based gambling sites?
It may worsen the UK balance of trade, as foreign
gamblers use UK sites less, and UK gamblers use
overseas sites more.