Quiz 2: Specificationlinked 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 materialEvery broadcaster has to have a licence from OfcomVideo 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 programsAdvertisements 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

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.

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 cartelsInvestigate 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 long-term.

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.