Question

"A function of government is to regulate ""natural monopolies."" Explain what is a natural monopoly and why it requires government regulation."

Answer 1

Answer- Meaning of Natural Monopoly- A natural monopoly is a type of monopoly that exist due to high startup cost or powerful economies of scale of conducting a business in a specific industry. Natural monopoly might be a only provider of a product or service in an industry or a geographical location.

Because of the following reasons monopoly requires government regulations:

- government intervention ensure the firm to meet the quality/standard of service.

- To prevent excess price charged by firm. If govt. Will not interven firm will charge excess price which will leads to allocative inefficiency and A decline in consumer welfare.

-to promote competition it requires govt. to regulate natural monopoly.

- to protect Monopsony buying power.

- to protect the interest of smaller groups to be flourish.

For example- the dominance of Microsoft in recent years has raised the question of whether its practices are monopolistic. Because the corporation control the majority in market , there is an overwhelming social pressure of its regulation.