The two primary methods of reg
The two primary methods of regulating monopoly power are to a)increase competition or b) set the price equal to the competitiveprice. Explain in words why neither of these regulations aredesirable if the monopoly is a natural monopoly. Please answer thequestion fully and in detail for a rating. Thank you.
Answer:
1)According to the first method, competition can be increased toregulate a monopoly. this is not possible for a natural monopolybecause if competition is increased and other firms are allowed tooperate, they all must have economies of scale. this is becausenatural monopoly has economies of scale where large scaleproduction decreases the per unit cost continuously. This givesnatural monopoly an advantage over other firms. it does not faceany competition because no other firm is likely to produce andsustain by charging the same price. Hence competition cannot beincreased
2) price cannot be set equal to the marginal cost which is alsocalled the competitive price. this is because average total cost isgreater than marginal cost at every unit for a natural monopoly. Ifprice is equal to marginal cost it will be less than average totalcost and there will be economic losses. Natural monopoly or even apure monopoly cannot sustain for long if there are economic lossesfor a long period. Therefore competitive price is not a goodstrategy for regulation of natural monopoly
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