Regulation of Natural Monopolies
Added on 2020-03-04
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Running Head: ECONOMICS 1Economics Individual AssignmentNameInstitution
ECONOMICS2Economics Individual AssignmentEssentially, natural monopolies exist due to the existence of high entry barriersfor other firms into the industry thus creating a single producer of goods and serviceswith no close substitutes. Regarding regulation of natural monopolies there is need toproperly understand market structure of natural monopolies, analyze merits and demeritsof this market structure and its relevant theories. Also, it is important to illustrate themethods used by government to regulate the operations of natural monopolies. Moreover,it is vital to understand how the government enforces its regulation to achieve the desiredregulatory goal. Equally, it is important to understand why the government considers itnecessary to regulate the operation of natural monopolies.Ways to Regulate Price Setting of a Natural MonopolyUndoubtedly, government regulation of the optimum prices for natural monopoliesis vital for consumer protection and welfare. Noteworthy, most governments haveincorporated taxation as a way to regulate the price of goods and services offered bynatural monopolies in the sense higher taxation is placed on higher prices of goods andservices(Boundless,2017) Additionally,price ceiling has been implemented by mostgovernments to contain the prices of monopolies in that the government sets a price limitfor a given good or service thus curtailing the freedom of natural monopolies fromcharging excessive prices(Welker,2013). The government creates a maximum price thatsellers can charge for their goods and services. Consequently, this leads to the regulationof the price charged by natural monopolies.
ECONOMICS3Further average cost pricing which reduces the flexibility of firms to set their ownprices is considered effective in regulating pricing in monopolies. For some naturalmonopolies, the price of goods and services are typically low due to the fact that averagetotal production cost continues to decline over a period of time(Pettinger,2012)Further,low cost are boosted by the fact that there is a fixed cost hence a natural monopoly canoperate without competition thereby maintain considerably lower prices thus no need forgovernment price control measures (Open Text, 2017)However, there will be need forgovernment to maintain anticompetitive measures for other firms to deter competitionfor natural monopolies who might otherwise raise their prices in the event of competition.Also, government ownership of natural monopolies keeps prices in check in thesense that the goal of operation will be public interest and consumer protection ratherthan profit maximization which might trigger exploitative prices(Spaulding,2017).Thegovernment can naturally monopolies necessary services such as water and electricitysupply so as to be able to avail the services to most citizens, the rich and the poor due toaffordability capabilities .Also, price floor have been implemented by variousgovernments to ensure natural monopolies make a substantial profit and at the sameinstance protect the consumers through setting of minimum price for commodities andservices. Price floors are meant to help business make profits despite minimum prices.Additionally, price caps have been used to control the price of goods and servicesfor consumer welfare (Tejvan, 2017) Usually price caps are determined by regulatorybodies. Through price capping,monopolies are forced to adopt prices way below the setprice over a given period of time (Open Text, 2017).Usually, price capping encouragessignificant price drops of goods and services over a given time frame. For instance, most
ECONOMICS4economies have water and electricity regulatory bodies under the government whichdecides the maximum price. Predominantly, regulatory bodies are meant to control theprice of commodities. Also, yardstick or the rate of return approach is used to regulateprices in that the size of the monopoly is considered with the optimal profit from thecapital such that in the case of excessive profits ,price cuts areimplemented(Tejvan,2016)Usually, yarding allows monopolies to cover their cost ofoperation while having substantial returns .Predominantly, legislation has been used to regulate various business activities andpricing for goods and services is no exception. Most economies have enacted priceregulations Acts and guidelines to guide monopolies and other firms in other marketstructures such as duopolies, on the minimum and maximum price for goods andservices. For instance, the Independent Republic of Papua Guinea,has enacted the PricesRegulation Act (Chapter 320) of its National laws(Independent Commission forConsumer and competition and Commission 2017)Most government have statutesregulating the prices of goods and services ,most specifically ,there are acts of parliamenton utilities. Usually utilities include services such as water and electricity.Largely, the non-existence of natural monopolies through encouragement ofcompetition from other industry players by government through relatively low barrierswill reduce monopoly power over price control thus regulating price of goods andservices.In the event that there’s perfect competitive market according to the concept ofperfect competitive markets, then there’s consumer sovereignty as opposed to monopolypower under natural monopolies .Natural monopolies are price setters as opposed to pricetakers in perfectly competitive markets. Ideally, perfect competitive markets are the best
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