Question

Identify, from media reports on Australian industry, an example of a firm that has significant monopoly power. Identify the inefficiencies in outcomes that arise, or would arise, if the firm was free to exercise that power.  Finally, explain how government intervention is used, or may be used, to curb that power and provide a more efficient outcome for the economy.

Answer 1

Among the industries which have monopoly power in Australia,domestic airlines is one.The inefficiencies associated with monopoly are-prices will be higher and output will be lower . Prices will tend to be higher than marginal and total average cost.Lack of competitors account for the monopolist not to worry even when poor quality product or service is provided by them. The firms try to keep barriers to entry so that they get maximum profit.The monopolist do a lot of price discrimination because of lack of competitors.

The government may intervene to curb monopoly.In order to protect the interest of the consumers the government may regulate prices because monopoly has the tendency to charge higher prices in the market. The government may try to promote the welfare of the consumers by doing so . The government may resort to price capping, yardstick competition etc.The government regulation will make it necessary for monopoly to provide quality service.In certain times the government decides to break monopoly if the firm becomes too powerful.The government also has merger policy to check mergers which might be responsible for creating monopoly.