Question

What is a “natural” monopoly? How is that different from a “government created” monopoly? What is the role of regulation in monopolistic markets? How and why does government exercise power over mergers and acquisitions? How does monopoly affect societal welfare?

 

Answer 1

Natural monopoly is a type of monopoly which exists because of the uniqueness of raw materials, technology or factors of production which is possessed by a single firm. It may also arise if the the start up costs or fixed costs of running a business in a particular industry is very high. It is different from a government created monopoly. A government created monopoly is a company that operates as a monopoly under the directions of the government. It sells a particular product or service at a regulated price. It is regulated by government and can be run either independently or by government.

Regulation is important in monopolistic markets so that the interest of the consumers can be protected. Monopolist is a price maker so a monopolist can set price above the competitive equilibrium. Thus government regulation is required so that high price could not be charged from the consumers. Also government regulation ensures that the quality of goods and services is maintained. Government regulation is required so that the monopolist does not take the advantage of the monopoly power and use it against the interest of the consumers.

Government exercises power over mergers and acquisitions because they lead to the reduction of competition in the market. This will make the merging firms more dominant in the market and they can control the price or supply in the market. The merging firms may take undue advantage of their increased market power and can use it against the public interest. Therefore, government exercises power over mergers and acquisitions and evaluates a merger or acquisition before it takes place.

Monopoly adversely affects the welfare of the society. Monopoly price is usually higher than average and marginal costs. A monopolist can charge a price above the competitive equilibrium and may restrict the output. A higher price lowers consumer surplus and hence the welfare of the society is also reduced.