Question

In: Economics

What kinds of actions can be taken to reduce the social welfare losses due to market...

What kinds of actions can be taken to reduce the social welfare losses due to market power?

Solutions

Expert Solution

Market power such as monopoly causes social welfare loss by setting price higher than in competitive market and producing less output than in competitive market.

Government or regulators can regulate such market and prevent market power by imposing certain laws and regulations -

i) setting a price cap - price capping enables regulators to limit increase in price. If regulators think a firm is charging too much to consumers, they can set a high level of percentage amount by which the firm has to cut it's prices in real terms.

ii) Merger policy - Merger often creates monopoly power. Government has a policy that if a new merger creates a firm with 25? of market share, then it will automatically be referred to competition comisson which has the power to allow or block the merger.

iii) Government can tax monopoly to reduce the market power they hold and force them to charge lower price.

iv) promoting fair competition- Government or regulators should promote fair competition and prohibit unfair commercial practices. Competition ensures efficiency, reduces market power of a firm, and results in lower price, variety of options available to consumers and increase social welfare.


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