Under which market structures is government regulation of prices justified? Explain your answer. I need the...

Under which market structures is government regulation of prices justified? Explain your answer.

I need the answer ASAP Please?

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Expert Solution

Under natural monopoly ,government regulation of prices is justified.

If a natural monopoly is not regulated, if it is left free to make its own profit-maximising price-output policy, then the inefficiency of monopoly would be too much for the society to accept.

In other words, principle of profit maximisation would not be able to properly utilise the economies of scale that give rise to a natural monopoly, and society would be the loser. That is why a natural monopoly needs to be regulated.

An alternative to regulate natural monopoly is to let the government operate it. If the government operates a natural monopoly, then ideally it should follow the p = MC principle and pay a lump-sum subsidy to keep the firm in operation.

By doing this, the government would cause the output of the firm to rise and price to fall which would often be a greater gain to the society than the loss involved in the payment of subsidy.

Rahul Sunny answered 10 months ago

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