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In: Economics

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?

Solutions

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.


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