ECONOMICS
COMPETITION AND MARKET STRUCTURES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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To increase competition in the market
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To prevent the monopoly from charging excessively high prices
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To ensure the monopoly provides an adequate, high-quality amount of the product
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All of the above are possible reasons for regulation
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Detailed explanation-1: -Why the Government regulates monopolies. 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.
Detailed explanation-2: -The government regulates a monopoly mainly to prevent excess prices in the market, promote competition, improve the quality of the service, and limit the monopoly power.
Detailed explanation-3: -The Govt. can regulate monopoly through taxation. Govt. can levy a tax per unit of output (Specific Tax) or impose a lump sum tax irrespective to its output.
Detailed explanation-4: -Rate of return regulation is a form of price setting regulation where governments determine the fair price which is allowed to be charged by a monopoly.
Detailed explanation-5: -First, there is only one firm operating in the market. Second, there are high barriers to entry. These barriers are so high that they prevent any other firm from entering the market. Third, there are no close substitutes for the good the monopoly firm produces.