Question

Explain advantages and disadvantages of government regulations concerning monopoly based on 1. price controls, 2. government ownerships, and 3. Anti-trust laws.  

Answer 1

Price Regulation

There are some products that can be provided at a lower cost by a natural monopoly than what could be provided by competing firms. The primary characteristic of a natural monopoly is that its average total cost declines continually over any quantity demanded by the market. If the industry has a large fixed cost, then a single firm can provide the product at a much lower cost than several or many firms, because the average total cost of each firm will be much higher than it will be for the natural monopoly

What price should be set for the natural monopoly? For a competitive firm, profit is maximized when marginal cost(MC) = market price. However, since the average total cost of a natural monopoly continually declines, the marginal cost will always be less than the average total cost (ATC), since the average total cost is the average of all costs including the large fixed costs while the marginal cost is only the extra cost of producing an additional unit. Therefore, a natural monopoly will continually lose money if the price that they can charge is limited to its marginal cost.

A better regulated price would be one that allowed the monopoly to charge a price — sometimes referred to as the fair-return price — equal to its average total cost, which in economics, also includes a normal profit. This would allow the natural monopoly to survive as a going concern, but it would not incentivize the owners to reduce costs. So this type the regulation can be enhanced by allowing the monopolist to keep some of the profits earned by reducing costs. Note that this price is less than the price charged by a profit-maximizing monopoly, which selects the price where marginal cost = marginal revenue (MR).

Government Ownership

Sometimes the government will regulate a monopoly by actually owning it. For instance, in the United States, the federal government owns the United States Postal Service, and in Europe, many governments own and operate utilities, such as water and electricity.

The main problem with government ownership is that these monopolies are operated by bureaucrats, and more often than not, they are unionized, so they have little incentive to operate the business efficiently or to provide good service to the taxpayer. Indeed, if technology were available that increased the efficiency of the monopoly, the bureaucrats would probably reject it to protect their jobs. Furthermore, the bureaucrats act as a special interest group who seeks to enrich themselves at taxpayers' expense. As a monopoly, they don't have to worry about competition. That bureaucrats, and especially unions, operate in their self-interest is well evidenced in the United States by their high salaries and lush pensions, even though most of their work is administrative and under ideal conditions. A primary reason that Greece is so far into debt is because a large part of the Greek economy consists of public workers, whose actual work is often nonessential or perfunctory, yet they have relatively large salaries and a nice pension, and they can retire quite young.

The main purpose of antitrust laws is to prevent business practices that either create or maintain a monopoly. Although this article discusses United States antitrust law, the basic principles will still apply worldwide, since monopolies operate much the same in most modern economies. Moreover, many of the legal remedies available in different countries will be similar, since they address similar situations.

In the United States, the 2 major antitrust laws are the Sherman Antitrust Act, passed in 1890, and the Clayton Antitrust Act, passed in 1914.