Question

Do you think it is necessary to regulate the naturally occurring monopolies that exist in the market today? 75 words or more

Answer 1

In the case of natural monopolies, the monopoly power arises naturally due to cost-reducing advantages that a particular firm faces. It can also arise in markets where the start-up cost is really high and a firm which has been in the market for a long time can drive new competition away. Firms that are natural monopolies thus have significant market power and influence. Under certain circumstances, it becomes necessary to regulate natural monopolies.

The firms may abuse their power in the market if left to operate on its own. If the natural monopoly firm is left to operate on its own, it will maximize profit at Marginal Revenue = Marginal Cost and charge a market price that is higher than MC and produce a quantity that is less than optimal. Firms would have economic profit and there would be a deadweight loss in the society due to the loss of consumer surplus. So, the result will be a socially sub-optimal outcome.

Thus, if the government feels that the concerned firm is abusing its power in the market, in such circumstances it becomes necessary to regulate naturally occurring monopolies so that a socially optimal equilibrium is reached. However, the regulations should be designed carefully so that the average total cost does not increase to such an extent that it nullifies or reverses the advantages that the firm receives completely. That will be an inefficient outcome.