Question

Present an argument in favor of monopoly regulation and also argue why monopolies should be left alone to do business as they see fit. Demonstrate in your argument that you have considered both sides of the argument.

Answer 1

Answer

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 should regulate monopolies because:

1. Prevent excess prices. Without government regulation, monopolies could put prices above the competitive equilibrium. This would lead to allocative inefficiency and a decline in consumer welfare.
2. 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.
3. Promote competition. In some industries, it is possible to encourage competition, and therefore there will be less need for government regulation.

However, it is not always a good idea to regulate the Monopolies. This is because:

1. Economies of scale under conditions of monopoly - The monopolist might be better able to exploit scale economies because they are producing on a larger scale to satisfy a large proportion of total market demand. If the monopolist achieving substantial increasing returns to scale - it can operate on lower cost curves.
2. The case of a natural monopoly - In some industries the nature of cost structures means that the minimum efficient scale of production (the scale of output when potential economies of scale are fully exploited) is very large relative to total market output. This is often found in industries where there is a high ratio of fixed to variable costs. With a natural monopoly there may be room for only one firm to fully exploit the potential economies of scale. The long run average total cost curve may continue to fall over a wide range of output – implying that the existence of several suppliers might lead to a loss of productive efficiency.