Economics Individual Assignment: Price Regulation of Monopolies

This economics assignment examines the concept of natural monopolies, characterized by high entry barriers and a single producer. It delves into the reasons for government regulation, focusing on consumer protection, allocative efficiency, and the prevention of abuse of market power. The assignment explores various methods of price control, including taxation, price ceilings, average cost pricing, and government ownership. It also discusses the use of price floors, price caps, yardstick regulation, and marginal cost pricing. The assignment highlights the importance of quality assurance, competition, and economic efficiency in regulating monopolies. Furthermore, it analyzes the role of legislation and the potential for market failure, concluding that while regulation aims to protect consumers, its effectiveness is debated due to practical limitations and the rare occurrence of true natural monopolies. The assignment emphasizes the importance of consumer welfare and a competitive business environment.

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Economics Individual Assignment
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Economics Individual Assignment
Essentially, natural monopolies exist due to the existence of high entry barriers
for other firms into the industry thus creating a single producer of goods and services
with no close substitutes. Regarding regulation of natural monopolies there is need to
properly understand market structure of natural monopolies, analyze merits and demerits
of this market structure and its relevant theories. Also, it is important to illustrate the
methods 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 desired
regulatory goal. Equally, it is important to understand why the government considers it
necessary to regulate the operation of natural monopolies.
Ways to Regulate Price Setting of a Natural Monopoly
Undoubtedly, government regulation of the optimum prices for natural monopolies
is vital for consumer protection and welfare. Noteworthy, most governments have
incorporated taxation as a way to regulate the price of goods and services offered by
natural monopolies in the sense higher taxation is placed on higher prices of goods and
services(Boundless,2017) Additionally,price ceiling has been implemented by most
governments to contain the prices of monopolies in that the government sets a price limit
for a given good or service thus curtailing the freedom of natural monopolies from
charging excessive prices(Welker,2013). The government creates a maximum price that
sellers can charge for their goods and services. Consequently, this leads to the regulation
of the price charged by natural monopolies.

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Further average cost pricing which reduces the flexibility of firms to set their own
prices is considered effective in regulating pricing in monopolies. For some natural
monopolies, the price of goods and services are typically low due to the fact that average
total 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 can
operate without competition thereby maintain considerably lower prices thus no need for
government price control measures (Open Text, 2017)However, there will be need for
government to maintain anticompetitive measures for other firms to deter competition
for natural monopolies who might otherwise raise their prices in the event of competition.
Also, government ownership of natural monopolies keeps prices in check in the
sense that the goal of operation will be public interest and consumer protection rather
than profit maximization which might trigger exploitative prices(Spaulding,2017).The
government can naturally monopolies necessary services such as water and electricity
supply so as to be able to avail the services to most citizens, the rich and the poor due to
affordability capabilities .Also, price floor have been implemented by various
governments to ensure natural monopolies make a substantial profit and at the same
instance protect the consumers through setting of minimum price for commodities and
services. 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 services
for consumer welfare (Tejvan, 2017) Usually price caps are determined by regulatory
bodies. Through price capping,monopolies are forced to adopt prices way below the set
price over a given period of time (Open Text, 2017).Usually, price capping encourages
significant price drops of goods and services over a given time frame. For instance, most

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economies have water and electricity regulatory bodies under the government which
decides the maximum price. Predominantly, regulatory bodies are meant to control the
price of commodities. Also, yardstick or the rate of return approach is used to regulate
prices in that the size of the monopoly is considered with the optimal profit from the
capital such that in the case of excessive profits ,price cuts are
implemented(Tejvan,2016)Usually, yarding allows monopolies to cover their cost of
operation while having substantial returns .
Predominantly, legislation has been used to regulate various business activities and
pricing for goods and services is no exception. Most economies have enacted price
regulations Acts and guidelines to guide monopolies and other firms in other market
structures such as duopolies, on the minimum and maximum price for goods and
services. For instance, the Independent Republic of Papua Guinea,has enacted the Prices
Regulation Act (Chapter 320) of its National laws(Independent Commission for
Consumer and competition and Commission 2017)Most government have statutes
regulating the prices of goods and services ,most specifically ,there are acts of parliament
on utilities. Usually utilities include services such as water and electricity.
Largely, the non-existence of natural monopolies through encouragement of
competition from other industry players by government through relatively low barriers
will reduce monopoly power over price control thus regulating price of goods and
services.In the event that there’s perfect competitive market according to the concept of
perfect competitive markets, then there’s consumer sovereignty as opposed to monopoly
power under natural monopolies .Natural monopolies are price setters as opposed to price
takers in perfectly competitive markets. Ideally, perfect competitive markets are the best

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market structure. In the event that natural monopolies are eliminated or unable to exist,
then it follows naturally that there’s no need for regulation by government .There’s need
for government to establish competitive business environment to balance out market
structures.
Alternatively, price control for monopolies can be regulated through marginal cost
pricing which requires that all natural monopolies to produce goods and services where
the quantity of goods supplied touches the demand curve thus setting the price for the
commodities and services produced by the natural monopoly (Open text,2017) Through
marginal costing, consumers are assured of surplus at considerably lower prices.Further,
there’sallocate efficiency for firms adopting marginal cost system of pricing attributed to
the marginal cost of goods incurred in production of the quantity supplied.Additionally,
cost plus regulation whereby government set price levels over a given period of time
through addition of normal profit rates to accounting costs of the firm has been adopted.
Lastly, the implementation of a government based deficiency scheme of payment
will for a long way in reducing the price of goods and services offered in the market and
the same goes for natural monopolies (ILRI, 2017)Through the deficiency scheme of
payment, producers of a good or services are given compensated profits on condition that
they charge low prices for consumer welfare. Moreover, there’s a consumer subsidy
which is aimed at boosting consumption at considerably lower prices with no impact on
natural monopolies(ILRI,2017)A consumer subsidy reduces the prices for goods and
services thus making them affordable for the consumers. The subsidy is offered by the
government to its citizen for domestic consumption and benefits.

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Reasons for Regulation
Essentially, governments may regulate the price of goods and services to protect
consumers from exploitative prices in that without regulation, natural monopolies will
set higher prices to maximize profits which ends up hurting the
consumers(Tejvan ,2016) .Further, regulation of natural monopolies is done to avoid or
reduce allocativeinefficiencies for natural monopolies(Stanbury,2015).Perfect
competitive firms are likely to experience allocative efficiency as compared to natural
monopolies(Tejvan, 2016)Economically and theoretically, perfect competitive markets
are ideal for consumer welfare and are considered economically and allocatively efficient
as contrasted with natural monopolies.
Further, Monopolies are regulated to prevent abuse of power(Pera, n.d).Typically,
monopolies are price setters thereby making consumers price takers. Typically, profit
maximization being the main goal of operating an enterprise, natural monopolies are
likely to charge the highest price for goods and services in the absence of government
regulation(Bigger, 2008) In addition, monopolies are regulated for quality assurance
reasons. Due to the existence of a monopoly, the firm might not fulfill the minimum
quality standards hence the need for government to intervene and ensure that the quality
of goods and services to be observed.Also, throughregulation, deadweight loss is
eliminated according to the deadweight loss hypothesis thus the ad vocation of marginal
costing to regulate monopolies (Bigger, 2008)
In addition, regulation of natural monopolies is vital in creating competition and
providing an equal footing for other firms in the industry(Brink of Economic

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thoughts,2017).Lack of competition,leaves consumers at the mercy of the natural
monopoly and other firms who would otherwise venture into that industry are prevented
to by high entry barriers and other advantages enjoyed by natural monopolies(Amir,2015)
.Further,natural monopolies undermine consumer choice and sovereignty due to the lack
of variety or substitute goods or services and price setting power respectively(Economics
Online,2017)More so,the ability of monopolies to regulate their output may be abused
through limited supply thus denying consumer surplus in order to hike prices for profit
maximization at the expense of the consumer .
Economic efficiency is also another motivator for government regulation in the
sense that unregulated monopolies are likely to have prices way above the marginal cost
and high production costs which is considered economically
inefficient(Boundless,2017)Further, market failure motivate the need for regulation. Also,
natural monopolies may depict high production costs just to deter entry of prospective
firms into the industry in an attempt to maintain monopoly power over its market share.
Perfectly competitive market structures are considered economically and allocatively
efficient hence making them the ideal market structure whereas natural monopolies are
considered inefficiently economic and allocatively thus the need for government
intervention to promote efficiency.
Typically, quality assurance is vital for consumer welfare hence the need for
government intervention in the operation of natural monopolies to ensure consumer get
the best quality goods and services.Usually,without any form of regulation or
monitoring,producers might get sloppy and greedy thereby producing substandard goods
which are harmful for consumption(Knownai,2011)By and large,regulation of

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monopolies exists to protect smaller firms likely to enter the market dominated by
monopolies(C.s. Stanford,N.d)in the case of regulation through windfall taxation systems,
governments aim to encourage reinvest of profits incurred by natural policies as opposed
to payment of dividends to its shareholders .In a way ,regulation helps distribution of
income between producers and consumer.
Through regulation of monopolies, restrictive trade practices and barriers are
eliminated.Essentially, the existence of a monopoly is characterized by high operating
cost, high entry barriers into the industry, large economies of scale among other factors
thus the need for government regulation to allow entry of other smaller and upcoming
firms (Investopedia, 2017) Natural monopolies deny other investors from entering its
share of the market due to the various advantages it has over smaller firms. Smaller firms
are unable to easily enter a naturally monopolized market as opposed to perfectly
competitive markets.Ideally,consumer interests such as choice, variety and sovereignty
are realistic in a perfectly competitive market as opposed to a naturally monopolized
market thus the need for regulation.
Conclusion
Undeniably, there are concepts, theories and principles advocating for and against
government intervention in the affairs of natural monopolies. Seldom do natural
monopolies exist but they do. Majorly, Regulation is all about consumer surplus,
satisfaction, choice, sovereignty and welfare as opposed to profit
maximization .Regulatory measures are enforced by government based agencies and
bodies, mainly through legislation. The most common ways of price control of monopoly

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power is through price ceiling, price capping, taxation, average cost pricing and marginal
cost pricing.Most of these regulatory prices are considered not mutually beneficial for
consumers and producers. Arguably, regulation seeks to protect the interests of
consumers rather than natural monopolies or producers.
All in all, government intervention through regulation is faulted for the
unforeseeable consequence of optimum price and output which is more theoretical than
practical. Further, government regulatory body’s employees are considered a tax burden
on ordinary citizens. Besides, natural monopolies rarely exist and if they do, they last for
a short period of time thus making regulation not a full proof solution for market failure
and inefficiencies. Nonetheless, the heart of regulation is in the right place as it seeks to
protect the consumer, who is considered weak as compared to producers.Through
regulation, most government strive to achieve consumer protection and welfare while
creating a friendly and competitive business environment as opposed to profit
maximization which is considered ideal for most economies as compared.

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References
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Independent Competition and consumer Commission.(2017)Prices Regulation Act,
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