[tex]\color{green}{\tt {Regulation \: of \: monopoly}}[/tex]
- The government may wish to regulate monopolies to protect the interests of consumers. For example, monopolies have the market power to set prices higher than in competitive markets. The government can regulate monopolies through:
- Price capping – limiting price increases
- Regulation of mergers
- Breaking into cartels and unfair practises
- Nationalisation – government ownership.
[tex]\color{red}{\tt {Why \: the \: Government \: regulates \: monopolies}}[/tex]
- Prevent excess prices. Without government regulation, monopolies could put prices above the competitive equilibrium. This would lead to allocative inefficiency and a decline in consumer welfare.
- Quality of service. If a firm has a monopoly over the provision of a particular service, it may have little incentive to offer a good quality service. Government regulation can ensure the firm meets minimum standards of service.
- Monopsony power. A firm with monopoly selling power may also be in a position to exploit monopsony buying power. For example, supermarkets may use their dominant market position to squeeze profit margins of farmers.
- Promote competition. In some industries, it is possible to encourage competition, and therefore there will be less need for government regulation.
- Natural Monopolies. Some industries are natural monopolies – due to high economies of scale, the most efficient number of firms is one. Therefore, we cannot encourage competition, and it is essential to regulate the firm to prevent the abuse of monopoly power.
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