Question

If we accept that the marketplace is the regulator for those industries where there is no monopoly, do you think that the marketplace makes the same decisions as a regulator? Why or why not? What objectives would a regulator who is regulating a natural monopoly pursue? Are these the best goals? Why or why not?

Answer 1

Marketplace does not makes the same decision as a regulator. Markets when set free, always focus on reaching an equilibrium middle for consumers and producers in case of a goods and services market, between labours and employees in a labour market and so on. Markets when set free, make the most efficient decision in order to maximise the monetary welfare. But regulators are actually intervening in the market process and they try to reach to an equilibrium they decide for maximum social welfare. In case of monopolies, monopolist charges prices higher than the competitive prices and earn super normal profits by exploiting the entire consumer surplus.

Apart from this, monopolies often drive the poor consumers out of the market due to higher prices. Here comes the role of a regulator who actually puts in price caps and takes steps to maximise social welfare. They might avoid any unfair practises by monopolies and try to promote competition. They might regulate the monopolies in such a way that their quality is not deteriorated.

These goals are very important for a regulator and from the stand point of society to keep equal division of resources among all sections and prevent any kind of illegal or unfair practises. When the markets are at play, trying to maximise the monetary welfare, regulators, by intervening are doing an extremely important job for efficient working of the economies. These may be one of the most important goals but if they are the best goals depends upon society and the problems it faces. Regulators, by intervening try to regulate such players because markets can't do this.