Question

Why monopolies arise and what governments can do in face of monopolies?

Explain briefly how the price floor works in a market if the government applies it. Use a specific real life example to argue for the application of it.

Answer 1

1) Monopoly arise because:

• Firm owns a key resource which no one else owns and helps them in producing goods.
• It occurs when government give exclusive rights to any producer to produce specific good.
• Natural monopoly occurs when cost to enter the market is so huge that not every producer can think of enetering in the market.

Government can remove barrier to enter, make hassle free entry and reduce paper work to help new producers entering in the market. They can also provide new producers loans at lower rate of interest and proper guidance to run the business.

2) Price floor occurs when government implements a price which is more than the equilibrium price. Minimum wage to labor is real life example of price floor when government implements it above the equilibrium wage rate such that they can attain a healthy life style and raise their standard of living.