Regulating Monopoly Power
Added on 2020-03-01
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GOVERNMENT AND NATURAL MONOPOLIES 1Government and monopoliesName of studentName of institutionName of instructorDate
GOVERNMENT AND NATURAL MONOPOLIES 2 IntroductionMonopoly market structure operates as the sole supplier in the market[ CITATION Rog15\l 2057 ]. They enjoy a large number of customers raising their product demand. They operate in a closed market, which other sellers are not able to enter the market and as a result, there isno competition in the market. The best way to analyse the market is to identify the market strengths and ability to influence supply and demand in the market.The government has a role of controlling monopoly prices. This is because market forces such as competition do not affect them[ CITATION nar14 \l 2057 ]. Therefore, the government response in controlling monopolies is important by setting policies for monopolies. Customers are citizens who require the government protection and thus require protection from monopoly exploitation.From an economics perspective, the issue of monopoly goes hand in hand with the issue of pricing of products. Monopolies make prices for their products and thus the customers lack the freedom of negotiating prices[ CITATION Micly \l 2057 ]. Additionally, there is the issue of influencing product demand and supply of products. They are the sole producers and thus through their production decisions determine how much of a product they will take to the market. Therefore monopolies unless controlled by the government, they are capable of exploiting their customers.
GOVERNMENT AND NATURAL MONOPOLIES 3Diagram illustrating how monopolies increase prices for commodities ExplanationPoint E represents the market equilibrium point before introduction of a price controlling measure such as taxes. The firm out is represented by OX while the price is OP.the firm earns profit represented by AB. However when the government introduces taxes, the average cost (AC) increases to AC1. The introduction of taxes raises the cost of production for monopoly firms. Consequently, the firm raises product prices in the market to recover added costs. The result is that the government should intervene to ensure maintenance of prices at equilibrium point[ CITATION Sea11 \l 2057 ].Monopoly marketThis are markets formed by a sole supplier of a particular commodity. The commodities dealt with have characteristics that make them difficult for other sellers to enter the market. The characteristics are such as private ownership of rights to sell the products. Other monopolies formed by government policies, which allow to sole product sellers. These
GOVERNMENT AND NATURAL MONOPOLIES 4products are such as weapons and other items concerned with national security. Barriers of entry to market also creates monopolies. This includes such as high legal fees to enter a market, which other sellers cannot afford. Monopolies are thus a result of inability of other sellers lacking the power or resources to enter a market[ CITATION Sea11 \l 2057 ].Furthermore, monopolies lack competition in their markets[ CITATION Cha17 \l 2057 ]. Their market due to the barriers to entry for other sellers lack competition. Competition resulting from other sellers dealing with similar goods lacks in the monopoly structure. Lack of competition causes monopolies to operate freely as there are no peers to compare operations or to take advantage of their market failures. This is a great advantage for monopolies due to the ability of doing what they want in the market without competition.In addition to that, monopolies are price makers. This means that they have the freedom of taking products to the market at the prices they deem profitable[ CITATION Lee17 \l 2057 ]. This separates them from other markets such as perfect competition, which are price takers. This refers to pricing of products based on the prices that the customers want to buy. Monopolies enjoy the freedom of setting any price for their products, which they feel, will cover fully for their variable costs and earn profit from sales. There is however, a tendency ofmonopolies setting very high prices to make exaggerated profits from sales. This act oppresses customers, as they have to pay too much for a product, which is usually more than the products utility. Monopolies require legislators to come up with policies that control the prices to stop high pricing. They are also able to practice price discrimination for their products. This is the sale of their products at different prices depending on the customers in a market or market trends. They sell large quantities of products at low costs in elastic markets and sell at high prices in inelastic markets. This they are able to do because of the free operation in the market.
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