Why regulate monopolies

The real question here is: should governments intervene and regulate these industries? Whatever is happening with Facebook now has happened before with Google a few years ago in Europ e. Governments do not condemn or encourage a certain company to dominate a market. The whole reason there has been little to no regulations for tech firms is to allow them to grow faster in an open environment and stimulate growth through limitless innovation.

However, tech firms are now valued so high that many of them are currently one of the largest in the world and there is no reason governments should not begin to enforce regulations against both monopoly and monopsony power, as well as regulations focused on protecting and limiting the use of user data. The firm then looks to point A on the demand curve to find that it can charge a price of 9.

Since the price is above the average cost curve, the natural monopoly would earn economic profits. A second outcome arises if antitrust authorities decide to divide the company, so that the new firms can compete.

As a simple example, imagine that the company is cut in half. Thus, instead of one large firm producing a quantity of 4, two half-size firms each produce a quantity of 2.

Because of the declining average cost curve AC , the average cost of production for each of the half-size companies each producing 2, as shown at point B, would be 9. Thus, the economy would become less productively efficient, since the good is being produced at a higher average cost.

In a situation with a downward-sloping average cost curve, two smaller firms will always have higher average costs of production than one larger firm for any quantity of total output.

In addition, the antitrust authorities must worry that splitting the natural monopoly into pieces may be only the start of their problems. If one of the two firms grows larger than the other, it will have lower average costs and may be able to drive its competitor out of the market. Alternatively, two firms in a market may discover subtle ways of coordinating their behavior and keeping prices high. Either way, the result will not be the greater competition that was desired.

A third alternative is that regulators may decide to set prices and quantities produced for this industry. The regulators will try to choose a point along the market demand curve that benefits both consumers and the broader social interest. Point C illustrates one tempting choice: the regulator requires that the firm produce the quantity of output where marginal cost crosses the demand curve at an output of 8, and charge the price of 3.

This rule is appealing because it requires price to be set equal to marginal cost, which is what would occur in a perfectly competitive market, and it would assure consumers a higher quantity and lower price than at the monopoly choice A.

In fact, efficient allocation of resources would occur at point C, since the value to the consumers of the last unit bought and sold in this market is equal to the marginal cost of producing it. Attempting to bring about point C through force of regulation, however, runs into a severe difficulty.

At point C, with an output of 8, a price of 3. Unless the regulators or the government offer the firm an ongoing public subsidy and there are numerous political problems with that option , the firm will lose money and go out of business. Perhaps the most plausible option for the regulator is point F; that is, to set the price where AC crosses the demand curve at an output of 6 and a price of 6. This plan makes some sense at an intuitive level: let the natural monopoly charge enough to cover its average costs and earn a normal rate of profit, so that it can continue operating, but prevent the firm from raising prices and earning abnormally high monopoly profits, as it would at the monopoly choice A.

Of course, determining this level of output and price with the political pressures, time constraints, and limited information of the real world is much harder than identifying the point on a graph. This cookie is used to collect statistical data related to the user website visit such as the number of visits, average time spent on the website and what pages have been loaded.

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If the industry has a large fixed cost, then a single firm can provide the product at a much lower cost than several or many firms, because the average total cost of each firm will be much higher than it will be for the natural monopoly.

Hence, a natural monopoly can provide a product for a lower price if there is no competition. Some examples of a natural monopoly include the distribution of natural gas, electricity, and landline phone service. What price should be set for the natural monopoly? However, since the average total cost of a natural monopoly continually declines, the marginal cost will always be less than the average total cost ATC , since the average total cost is the average of all costs including the large fixed costs while the marginal cost is only the extra cost of producing an additional unit.

Therefore, a natural monopoly will continually lose money if the price that they can charge is limited to its marginal cost. A better regulated price would be one that allowed the monopoly to charge a price — sometimes called the fair-return price — equal to its average total cost, which in economics, also includes a normal profit. This would allow the natural monopoly to survive as a going concern, but it would not incentivize the owners to reduce costs.

So this type the regulation can be enhanced by allowing the monopolist to keep some of the profits earned by reducing costs. Sometimes the government will regulate a monopoly by actually owning it. For instance, in the United States, the federal government owns the United States Postal Service, and in Europe, many governments own and operate utilities, such as water and electricity.

The main problem with government ownership is that these monopolies are operated by bureaucrats, and more often than not, they are unionized, so they have little incentive to operate the business efficiently or to provide good service to the taxpayer. Indeed, if technology were available that increased the efficiency of the monopoly, the bureaucrats would probably reject it to protect their jobs. Furthermore, the bureaucrats act as a special interest group who seeks to enrich themselves at taxpayers' expense.