Understanding Monopolies and Regulations
Added on 2020-02-24
13 Pages2717 Words192 Views
|
|
|
Running Head: MONOPOLIES 1Why and How Governments May Want to Regulate Natural MonopoliesNameInstitution
MONOPOLIES 2Why and How Governments May Want to Regulate MonopoliesIntroduction In every economy, natural monopolies play a significant role. Primarily, a monopolyrefers to a market in which when only one firm operates and dominates an entire industry(Beggs, 2016). On the other hand, a natural monopoly is a specific type of monopoly that ariseswhen a single find firm dominates the market due to extremely high startup capital and fixedcosts associated with operating in the market. Mainly, natural monopolies exists where there arehigh fixed costs of production and distribution, thereby necessitating economies of scale. Aperfect example of a natural monopoly is the electricity company. It is characterized by highcosts of infrastructure in terms of grids and cables for electricity supply. Thus, the efficientnumber of firms in the industry is one. It is noteworthy that a natural monopoly market differsfrom a perfect competition in terms of competition, entry and exit requirements, and number ofsellers. In a perfect competition, there is free entry and exit of firms while there are high barriersto entry in natural monopoly markets. There is also no form of competition in natural monopolieswhereas there is high competition in perfect competition markets. Thus, the structure of naturalmonopolies provides room for consumer exploitation and governments may want to regulatemonopolies to ensure that they produce high quality, fair priced goods at efficient levels.
MONOPOLIES 3Analysis Reasons for RegulationHigh Monopoly Market PowerOne of the major reasons as to why the government may seek to regulate naturalmonopolies is due to their market structure. As such, the market structure of a natural monopolynecessitates that various measures must be initiated to control firms from exploiting theircustomers. In a nutshell, a natural monopoly operates as the sole producer of a given product(Arkani, 2010). The firm is also a price maker. Usually, firms limit the quantity they produce inorder to push their prices upwards. Furthermore, the market is also characterized by high barriersto entry into the market caused by high capital requirements (“Monopoly,” n.d.). There are alsohigh legal barriers in the market. For this reason, the firm has a high market power andinfluences the market. Therefore, the government may step in to limit the market power ofnatural monopolies to ensure that they do not exploit their customers. Control Price Level As noted earlier, natural monopolies do not face any form of competition in their market.Therefore, they possess a high market power, and are able to control the quantity of goods. Inturn, they have the power to set their own prices. In most cases, natural monopolies abuse theirmarket power and set high prices for their goods and services, higher than the price they wouldhave charged if the firm operated in a competitive market structure (Welker, n.d.). For thisreason, governments may want to regulate them in order to preserve consumer welfare.
MONOPOLIES 4According to economic theory, monopolies set their prices at a point that maximizes theirprofits. Normally, firms manufacture goods at the point where their marginal costs of productionequals the marginal revenue. However, they charge the price determined by the demand curve.For this reason, the price they charge is usually high than the marginal cost of production.Consequently, this allows them to obtain high profits at the disadvantage of their consumer’swelfare. Monopoly Pricing TechniqueATC PriceMC CurvePmbDeadweight Loss ATCProfit aDemand CurveMRQuantity Source: (Pettinger, 2012).Perfect Competition pricing PriceSupply CurveP*eDemand CurveQ*Quantity
End of preview
Want to access all the pages? Upload your documents or become a member.
Related Documents