Thus, if water companies need to invest in better water pipes, they will be able to increase prices to finance this investment. K is the amount of investment that the water firm needs to implement. In water, the price cap system is RPI -/+ K. In the early years of telecom regulation, the level of X was quite high because efficiency savings enabled big price cuts. If the regulator thinks a firm can make efficiency savings and is charging too much to consumers, it can set a high level of X. Then firms can increase actual nominal prices by 3-1 = 2%.X is the amount by which they have to cut prices by in real terms.Therefore, we cannot encourage competition, and it is essential to regulate the firm to prevent the abuse of monopoly power.įor many newly privatised industries, such as water, electricity and gas, the government created regulatory bodies such as:Īmongst their functions, they are able to limit price increases. Some industries are natural monopolies – due to high economies of scale, the most efficient number of firms is one. In some industries, it is possible to encourage competition, and therefore there will be less need for government regulation. For example, supermarkets may use their dominant market position to squeeze profit margins of farmers. A firm with monopoly selling power may also be in a position to exploit monopsony buying power. Government regulation can ensure the firm meets minimum standards 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. This would lead to allocative inefficiency and a decline in consumer welfare. Without government regulation, monopolies could put prices above the competitive equilibrium. Nationalisation – government ownership.Investigations into cartels and unfair practises.Price capping – limiting price increases.The government can regulate monopolies through: For example, monopolies have the market power to set prices higher than in competitive markets. The advantages of a monopoly include economies of scale and dynamic efficiency.The government may wish to regulate monopolies to protect the interests of consumers.Productive inefficiencies and exploitation are two of the main inefficiencies created by monopolies.The diagram for a monopoly's profit is considered to be the same in both the short and the long run.The monopoly can either be a price maker or a quantity setter.Governments can create monopolies in certain industries.A geographical monopoly can occur when only one country has access to certain commodities or raw materials.A natural monopoly is when the market only has room for one firm.Market factors that influence monopoly power include:.This means that there is one dominant firm in the industry that produces most of the output. As opposed to a pure monopoly, where only one seller owns the entire market, the existence of some degree of monopoly power is more common in industries.A pure monopolist has no competitors (does not face any competition) as they represent the entire industry.This seller owns all of the market share. A pure monopoly is a market that only contains one seller.Price Determination in a Competitive Market.Market Equilibrium Consumer and Producer Surplus.Determinants of Price Elasticity of Demand.Cross Price Elasticity of Demand Formula.Effects of Taxes and Subsidies on Market Structures.Monopolistic Competition in the Short Run. Monopolistic Competition in the Long Run.Behavioural Economics and Public Policy.
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