Essay on Natural Monopoly: Regulations

Added on -2020-02-19

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Running head: NATURAL MONOPOLY: REGULATIONS Natural Monopoly: RegulationsName of the StudentName of the UniversityAuthor Note
1NATURAL MONOPOLY: REGULATIONS Introduction In economics, a market is defined as the place of interaction of the demand and thesupply forces that is a market is an area where the buyers and the sellers interact and reach toprice and quantity decisions. Depending upon the nature of commodity or service produces,number of buyers and sellers, barriers to entry and exit and distribution of the market power,markets can be perfectly competitive or non-perfectly competitive. Monopoly is the extremeopposite to that of perfectly competitive market (Scitovsky, 2013). One seller and many buyers,thereby implying that the single seller enjoys the total market power, characterize a monopolymarket. In general, the monopoly framework does not lead to efficient allocation of resources, asthe sellers tend to maximize their own profit, thereby leading to the presence of dead-weight lossin the market. However, there arises several instances where the presence of a monopolist dobring efficiency in the market by operating at economies of scale. This efficient form ofmonopoly is known as natural monopoly and it generally occurs when a firm produces at thefalling part of its average cost curve and is still able to fulfill the demands in the market (Chen &Schwartz, 2013). Natural monopoly, thus, can be said to be an efficient form of monopoly and in that case,intervention and division may lead to a inferior market condition with higher costs of productionand as a result a higher level of prices. Generally, public services and utilities lie those ofelectricity, water, in some cases arms and ammunition, are examples of natural monopoly, as onebig seller (In most of the cases government being the producer) produces the good at a lower costdue to the presence of increasing returns to scale. In most of the cases, natural monopoly arisesin those productions of goods and services where there is a very high fixed cost as compared to
2NATURAL MONOPOLY: REGULATIONS the variable cost. After incurring the huge fixed cost, as production increases, the seller startsenjoying economies of scale. Monopoly market, by nature, tends to give all the market power and decision makingcapabilities in the hands of the sellers and therefore, in absence of any kind of regulations, theseller may try to misuse his power to fulfill his interest of personal welfare maximization, even ifit comes at the cost of the welfare of the society. The essay discusses the difference betweennatural monopoly, market monopoly and perfectly competitive situations, emphasizing on thepricing strategies that an be taken in a regulatory natural monopolistic framework to increase thewelfare of both the buyers and the sellers (Scitovsky, 2013). Comparison between perfect competition and monopoly The exact opposite of the monopolistic market condition is that of the perfectlycompetitive market, where there are many sellers and many buyers and the market power isuniformly distributed. The sellers and buyers being many in numbers, each of them is a pricetaker. The perfectly competitive market allows free entry and exit of new and old economicagents, buyers or sellers. Due to the presence of uniform knowledge and market power, thesellers or the buyers cannot take extra advantages. Therefore, the equilibrium in this marketoccurs at the point where the welfare of the society is maximized, at the point of interaction ofthe demand and the supply curve, resulting in normal profit for the firms in the long run (Thiel,2014). However, in case of the monopoly market, the firm itself is the industry. Therefore, thesupply curve of industry is itself the marginal cost curve of the monopolistic producer. This
3NATURAL MONOPOLY: REGULATIONS implies that being a decision maker, he tries to set the price of its product at the point wheremarginal revenue is equal to the marginal cost of the monopolist. The difference between the twomarkets can be shown with the help of two diagrams, which are as follows: (Source: As created by the author) It is evident from the above comparison between the monopoly and the perfectlycompetitive market that there is no dead-weight loss in the latter one. The consumers and theproducers interact in the market to reach to the efficient equilibrium E, where the equilibriumprice becomes Pc and the equilibrium quantity becomes Qc. However, in presence of themonopolistic condition, the monopolist operates at the point where MC cuts his MR curve.Therefore, the price the monopolist charge becomes Pm, which is much more than the Pc, and

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