Question

What are two problems governments may face when regulating monopolies?

Answer 1

Cost-plus legislation poses concerns on its own. If farmers are reimbursed for their expenses, plus a little more, so at a minimum, farmers have little incentive to complain about high costs — because at low rates they will only push them through. Worse, under cost-plus control companies may have an opportunity to produce high prices by constructing large plants or hiring tons of workers, as what they will charge is tied to the prices they incur.

Price cap regulations requires delicacy. It won't work if price regulators unrealistically set the price limit low. It does not succeed if the economy shifts significantly enough that the company is doomed to losses irrespective of what it does — say, if electricity costs increase drastically on global markets, then the company supplying natural gas or heating oil to homes will not be able to reach price limits that a year or two ago appeared fair. But if the regulators equate prices in other areas with suppliers of the same product, they may, in turn, compel a natural monopoly in one region to compete with prices paid in other areas.