Question

Should the government regulate monopolies? If yes, outline the economic implications and process of regulation. Watch the video below and from the resources in the course, give an answer to this question.

Answer 1

The government may wish to control monopolies to protect consumer interests. Monopolies, for example, have the market power to set higher prices than those in open markets. State can control monopolies by: price capping – restricting price rises Mergers legislation Breaking up monopolies Nationalization of monopoly inquiries and unfair practices – government ownership.

Prevent overpricing. Without government control, monopolies may put prices above the equilibrium of competition. This would result in inefficiency in the allocation and a reduction in consumer welfare.
Service standard. If a corporation has a monopoly over the delivery of a specific service, there might be little motivation for it to provide high quality service. Government oversight will ensure the organization meets minimum service requirements. Control over monopsony. A business with monopoly sales power can also be able to exploit monopsony buying power.

Based on the state of the market, and possible cost gains, the regulator will set price increases.
When a company is cutting costs by more than X, it will increase its earnings. There is potentially an opportunity to lower costs. Competition superrogate. RPI-X is a way to increase competition and discourage misuse of monopoly control, in the absence of competition. It's costly and hard to determine what level X would be.
There is a chance of regulatory capture, where regulators are too soft on the company, allowing them to boost rates and make supernormal profits. Companies may argue, however, that regulators are too stringent, and do not allow them to make enough investment profit.