Regulate The Price Setting Of A Natural Monopoly †Free Samples

Question: Explain How And Why Governments May Want To Regulate The Price Setting Of A Natural Monopoly. Answer: Introduction This study deals with explaining how and when government may want to regulate the price setting of a natural monopoly (Ward Begg, 2016). The current segment explains the reasons to why Government regulates monopolies. Some of the reasons are prevention of excess prices, value of service, Monopsony power, encourage competition and normal monopolies. To that, the next segment explains how the government regulates monopolies. Price capping by controller, guideline of value of service, merger policy, breaking up a monopoly, rate of return regulation and assessment of abuse of monopoly power are some of the conduct on how Government control monopolies (Greco, Matarazzo S?owi?ski, 2016). It is noted that Government regulators faces difficulty in dealing with natural monopolies in industries such as electricity business. It is because an electricity company with a monopoly in a specific market will definitely base its price as well as output decisions on the profit maximization regulation . To this, there is requirement for government regulation as the government is intended with getting the right amount of electricity to the right number of group that means allocating efficiently. This means the Government may select to set a price ceiling for electricity at the level where the price equals the marginal cost of the firm (Vogel, 2014). A monopoly can be termed as business or organization that maintains exclusivity if the supply of a specific product or service as evolves naturally or designed specifically that depends upon the nature of a market or industry (Tietenberg Lewis, 2016). In addition, Monopolies are governed under laws both on a national levels in countries and international levels through involvement of institutions like World Trade Organization. The concept of monopoly considered as a danger to free markets where there are particular situations takes place when natural monopolies are either practically helpful or cost efficient or practically inevitable. In most of the extreme situation, it becomes the most feasible alternative for governments to break up monopolies by using lawful procedure in the most appropriate way (Greco, Matarazzo S?owi?ski, 2016). Analysis Reason to why Government regulates monopolies Preventing excess prices- It is important to understand the reason behind why Government regulates natural monopoly is to stop excess prices (Shefrin, 2015). If there is no involvement of Government, then monopolies could set prices above the competitive equilibrium as and when required. This circumstance would lead to allocating incompetence as well as decline in the customer wellbeing as a whole. Quality of service- Regulation by Government are important, otherwise firms has a monopoly over the stipulation of specific service where they may have little inducement to present to get access good quality service. When there is government intervention to natural monopoly, the firm is bound to meet minimum standards of services (Posner, 2014). Monopsony power- It is noted that a firm that has monopoly selling power tends to remain in a location to use Monopsony buying power (McCabe Snyder, 2015). For instance, supermarkets usually use their chief market position to condense the profit margins of farmers. Encourage competition- In some of the industries, it is feasible to support competition and that leads to condition where there will be less need for government instruction (Lim Yurukoglu, 2015). Natural monopolies- It is found that some of the business is natural monopolies because of high economies of scale. In addition, it is not likely to support competition in this type of business and it becomes stipulation to manage the business to evade the abuse of monopoly power (Hawley, 2015). Explain on how the Government regulates monopolies Price capping by regulators RPI-X (Retail-Prices Index)- For most of the lately privatized industries like water, gas and electricity, the government had shaped dictatorial bodies (Greco, Matarazzo S?owi?ski, 2016). OFGEM is for gas and electricity markets, OFWAT for tap water and ORR is for Office of rail regulator. Irrespective of their rationale, the Government is able to limit the increased price. They can do it with a formula (RPI-X), where X is the amount by which they have to cut prices by in real terms. For illustration, if rate of inflation is 3% and X equals 1%, then firm can improve actual prices by (3-1)= 2% (Granger, 2014). In addition, if a regulator feels that a business can make competence savings as well as charging too much from the customers, them they can set high level of X. For illustration, in the early years of telecom set of laws, the level was quite high as competence savings enables big price cuts (Grammenos, 2013). RPI+/-K-for water industry- In case of water, the price cap system is RPI -/+K Here, K is the amount of investment where the water firms need to execute. In addition, if water companies need to spend in better water pipes, then they will be able to boost prices to backing the speculation (Fourcade Khurana, 2013). Benefits of RPI-X Regulation One of the benefits to RPI-X Regulation is that the supervisory body can set the price increase that mainly depends upon the state of the business as well as possible efficiency savings (Cowen Tabarrok, 2015). Other benefits of RPI-X Regulation is that if a firm cut costs by more than X, they can easily increase the profits. In addition, the firm can even argue that there is an incentive to cut costs (Greco, Matarazzo S?owi?ski, 2016). Other benefits of RPI-X Regulation are surrogate competition. Without competition, RPI-X is one of the ways to increase competition as well as preventing the abuse of monopoly power (Comanor et al., 2014). Limitations of RPI-X Regulation One of the limitations of RPI-Regulation is expensive and complicated in deciding the component that what the level of X should be There is a risk of authoritarian capture where the supervisor becomes too soft on the business as well as allows them for increasing prices and making supernormal profits (Bs, 2015). In addition, business may argue with the regulators as they are stringent and do not permit the firms to make enough profits for investment (Ward Begg, 2016) For instance, if firms become very much efficient, the firms may be penalized by having higher levels of X where they cannot keep their efficiency savings (Greco, Matarazzo S?owi?ski, 2016). Regulation of quality of service- It had been found out those regulators examines the value of services as given by the monopoly (Ward Begg, 2016). For instance, the rail manager mainly inspects the safety evidence of rail firms so that they do not cut corners. Another example is gas and electricity markets where the supervisor make sure that old people are treated with care such as not allow a monopoly to cut off gas provisions in winter (Anderson, 2013). Merger policy- It is noted that the Government has the strategy where they examine mergers that could generate monopoly power. For instance, if a new merger generates a business with more than 25% of total market share, then it repeatedly referred to the Competition Commission. After that, it is the responsibility of Competition Commission to choose whether to permit or obstruct the merger (Greco, Matarazzo S?owi?ski, 2016). Breaking up a monopoly- It may happen in most of the cases where the Government can choose upon monopoly needs that are to be wrecked up when it is seen that firm has become too powerful. This type of situation hardly takes place (Ward Begg, 2016). Yardstick or rate of return regulation- Rate of return regulation is an unusual way of changeable monopolies to the RPI-X price capping. To this, this guideline looks at the size of the firm as well as evaluates on the fact on what is needed for getting access to rational level of income from the resources base. For instance, if a business is making too much profit as contrast to their relation size, then the controller may implement price cuts for solving the problem (Ward Begg, 2016). Return on return regulation also has certain limitations as it encourages cost padding (Comanor et al., 2014). For instance, the regulation is implemented when firms permit costs to increase so that profit levels are not extreme. In addition, this type of regulation provides little inducement to be competent as well as increase profits. Therefore, the rate of return directive may fail for evaluating how much profits can be rational. In that case, it the profits are set too high, and then the business can abuse its monopoly power. Assessment of abuse of monopoly power- It is noted that the office of fair training aims at examining the abuse of monopoly power. In addition, there are several unfair trading practices that take place and some of these are as follows: Collusion takes place when firms agree to set higher prices (Comanor et al., 2014) Collusive tendering takes place when business penetrate into conformity for fitting the bid at which they will tender the profits. In addition, the business will take it for receiving the agreement as well as enabling a much high price for the agreement (Greco, Matarazzo S?owi?ski, 2016). Predatory pricing takes place when the firm set low prices so that they force rival firms to go out of business (Ward Begg, 2016) Selective distribution Vertical restraints takes place when the firms prevents retailers stock rival products (Comanor et al., 2014) Conclusion From the above analysis, it is concluded that there is need for government regulation for regulating natural monopolies otherwise firms will set prices with a view to gain maximum profits and will not be considerate towards the quality of products and services assistance. The Government may wish to direct natural monopoly in order to protect the interests of the consumers. For illustration, monopolies have the market authority where they can set prices high than the aggressive markets. Ways adopted by Government to control natural monopolies can be price capping, avoiding the expansion of monopoly power and yardstick competition. References Anderson, P. 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