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Regulating Natural Monopolies Principles of Economics

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Added on  2020-02-24

Regulating Natural Monopolies Principles of Economics

   Added on 2020-02-24

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Running head: REGUALTION; NATURAL MONOPOLYRegulation; Natural MonopolyName of the StudentName of the UniversityAuthor note
Regulating Natural Monopolies Principles of Economics_1
1REGULATION; NATURAL MONOPOLYIntroductionIn economic terms, market represents exchange relation between buyers and sellers.Depending on several aspects of market such as how many buyers and sellers presence in themarket, what type of product the specific market sold, size of the market determines specificcategory of market. Most commonly used market classification is based on the buyers and sellersin the market. Efficient allocation of resources depends on specific structure of the market. Theless is market power the more efficient is allocation. In this regard, market power is highest for aseller operating in a monopoly market, a market characterized by a single seller and numerousbuyers. A monopoly market in its general form is less efficient than a competitive market.A related form of pure monopoly is natural monopoly. The difference between puremonopoly and natural monopoly is that in the presence of a pure monopolist, competition ismore preferred to a single seller. However, in a natural monopoly market the presence of singleseller entails maximum efficiency. This is because the natural monopolist operates at a point inaverage cost curve, such that scale benefit can be enjoyed. In the natural monopoly market, needfor government regulation is realized to ensure an efficient pricing. AnalysisMonopoly and perfect competitionIn a standard monopoly market, equilibrium combination of price and quantity is derivedfrom the profit maximization condition. In the monopoly market, control of price is in the handof monopolist. The point where revenue from selling marginal quantity matches with the cost ofproducing marginal quantity is considered as profit maximizing point (Currie, Peel, & Peters,2016). Price in the monopoly market exceeds marginal cost generating profit for the monopolist.
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2REGULATION; NATURAL MONOPOLYFigure 1 shows condition in the monopoly market. Profit of the monopolist is shown by theshaded region.Figure 1: Monopoly market Condition(Source: As created by the Author)The mechanism in a competitive market is opposite. Price and output in the competitivemarket is determined by the with free market supply demand condition. The demand curve hereis identical with marginal benefit curve and marginal social cost is identical with market supplycurve (Askari, Iqbal & Mirakhor, 2015). Therefore, matching of supply and demand showsparity between marginal social benefit and marginal social cost and hence is socially efficient.Market situation with a monopoly and competition is compared in the following figure.
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3REGULATION; NATURAL MONOPOLYFigure 2: Comparing monopoly and competitive market (Source: as created by the Author)The supply curve or marginal social cost curve is the marginal cost curve the monopolist.Price and quantity in the monopoly market is Pm and Qm and that of a competitive market is Pcand Qc respectively. It is clearly seen from the diagram that Pm>Pc and Qm<Qc. The loss to thesociety in operation of monopolist and resulted low output and high price is indicated as thedeadweight loss to the society (Wang, 2016). Natural monopolyFrom the earlier discussion, it is clear that the position of a single seller in the monopolymarket is not socially desirable. The status of a single supplier is retained by creating entrybarrier in the market. Natural monopoly is a market where natural barrier restricts entry of newseller in the market (Yang & Ng, 2015). The natural barriers refer to conditions where other
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