Abuse of Monopoly Power

Question 1

What can be done to prevent abuse of monopoly power

Answer 1

• Government regulations: To achieve a greater degree of allocative efficiency by price capping or regulating mergers to0 limit the size of combined firms

Question 2

How does this link with natural monopolies?

Answer 2

• Although monopolies need to be heavily regulated to prevent anti-competitive behaviours, Natural Monopolies such as water and power supplies will always exist for the provision of necessities
• Governments are compelled to intervene to prevent them from abusing their monopoly power by forcing them to produce at the allocative (AR = MC) or productive efficiency point (AR=AC)
• However, when natural monopolies produce at the allocative efficiency point, AR becomes below AC thus, governments will need to subsidise the difference to allow the business to at least make normal profits
• For this reason, natural monopolies may always exist as they can provide necessities at a lower cost despite not being productively efficient