IAI Actuarial Core Principles · Business Economics · Supply-side policies and their impact on businesses
A regulator removes licensing restrictions that limited the number of insurers allowed to sell a type of motor cover, so new entrants can enter the market. Which outcome is most consistent with the supply-side rationale for this deregulation?
Removing licensing limits makes the market more contestable, because new entrants can compete. Incumbent insurers are pushed to cut costs, improve efficiency and innovate, and competition tends to lower premiums over time. This is the standard supply-side case for deregulation.
- AHigher barriers to entry and greater market power for incumbents
- BIncreased contestability, pressure on incumbents' costs and lower premiums over timeCorrect
- CA rise in the natural rate of unemployment across the economy
- DAn immediate increase in the government's tax revenue from insurers' profits
- A fall in the long-run productivity of the insurance sector
Explanation
Deregulation lowers barriers to entry, making the market more contestable. Incumbents face pressure to cut costs and innovate, and competition tends to reduce prices. Options suggesting higher barriers, lower productivity or higher unemployment contradict this logic.
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