Question

Describe how government is involved in creating a monopoly. Why government create monopoly? Give an example.

Answer 1

When the government allows or creates a monopoly within a market, that is in essence a government monopoly. The government is either directly or indirectly the only provider of a necessary service or product and other competition is not allowed. Essentially, governments create monopolies to keep the prices of such amenities within all consumers' reach.

The government may wish to regulate monopolies to protect the interests of consumers. For example, monopolies have the market power to set prices higher than in competitive markets. The government can regulate monopolies through:

• Price capping – limiting price increases
• Regulation of mergers
• Breaking up monopolies
• Investigations into cartels and unfair practises
• Nationalisation – government ownership.

The government can create a monopoly by giving a single firm the exclusive right to produce some good. Monopolies are created for many reasons; one important one is the recognition that a single firm in industries characterized by high fixed costs can usually supply the entire market at a lower cost than multiple firms in the industry. Examples include most utility companies. The government also grants sole ownership of inventions through patent laws in order to help eliminate the market failure that is likely to otherwise occur in the markets for those good

Government create monopoly to -

1. Quality of service. If a firm has a monopoly over the provision of a particular service, it may have little incentive to offer a good quality service. Government regulation can ensure the firm meets minimum standards of service.
2. Monopsony power. A firm with monopoly selling power may also be in a position to exploit monopsony buying power. For example, supermarkets may use their dominant market position to squeeze profit margins of farmers.
3. Promote competition. In some industries, it is possible to encourage competition, and therefore there will be less need for government regulation.
4. Natural Monopolies. Some industries are natural monopolies – due to high economies of scale, the most efficient number of firms is one. Therefore, we cannot encourage competition, and it is essential to regulate the firm to prevent the abuse of monopoly power.