fulEffects?Why can therefore be compared to perfect competition.

fulEffects?Why can therefore be compared to perfect competition.

fulEffects?Why Is Monopolies Harmful and How Can Regulation Ameliorate These HarmfulEffects?Why is monopoly harmful? How can regulation ameliorate these harmful effects?What problems confront the regulators?In order to deduce that a monopoly is harmful’, there must be another marketsystem which is preferable to monopoly so as to offer greater benefits to thepublic. A monopoly can therefore be compared to perfect competition. If thebenefits of perfect competition outweigh the benefits of monopoly then amonopoly can be regarded as harmful’ since the consumers are not receiving themaximum possible utility for their purchases.

Monopolies are criticised for their high prices, high profits and insensitivityto the public. Some governments therefore, in the light of these protests,advocate policies relating to monopolies, in order to regulate their power infavour of the public’s interest.There are several reasons why monopolies may be against the public interest. Itis claimed that monopolies produce at a lower level output and charge a higherprice than under perfect competition in both the short run and the long run.Consider the diagram above.

Assume that this monopolist attempts to maximiseprofits. Equating MC=MR yields an output of Qm and a price of Pm. If the sameindustry existed under perfect competition however, the price would be Ppc andoutput would be Qpc since under perfect competition P=MC=AR. The price in such asituation would thus be lower than under monopoly and output would be greater.

Consumers obviously benefit if this is the case since P=MC implies P=Marginalutility so that consumers are maximising their total utility(Under monopoly P;MCand therefore arguably, not the optimum).In the long run under monopoly, supernormal profits persist. Under perfectcompetition complete freedom of entry leads to the elimination of these profitsand forces firms to produce at the bottom of the long run average cost curve.Under monopoly however, there are barriers to entry so as to prevent new firmsfrom entering the industry and reducing the monopolist’s profits to the normallevel. Higher prices and lower output thus continue to persist in the long run.

Due to lack of competition, it is argued, a monopolist has no incentive todevelop new techniques in order to survive. A monopolist can therefore makesupernormal profits without using the most efficient techniques. Under perfectcompetition, in order for firms to survive, the most efficient techniques mustbe adopted or developed whenever possible or else the firm which fails to do sowill be forced to shutdown. This argument leads to the conclusion thatmonopolies have higher cost curves than firms under perfect competition(Assumingthat the monopolist does not use supernormal profits to finance research anddevelopment and hence reduce costs.

).Even if a monopolist does invest in research and development, although priceswill fall and output will rise, extra supernormal profits received will merelyaccumulate with old profits. These high profits lead to the question ofdistribution of income. The answer to this question is a normative one and isthus subject to much controversy. It is therefore up to the government to decideif intervention is necessary to curb a monopolist’s power and hence to upholdthe public interest.If the government weighs up the cost and benefits of monopoly’ and concludesthat they are in fact harmful’, the government can adopt policies ofintervention or regulation.

The diagram below shows how a government can keep the price at a maximum Pmbelow market equilibrium.The government may feel that a price of op1 is excessive so a price of opm isimplemented. At this price however, the monopolist is only willing to supply oq1units while quantity demanded is oq3 units. There is thus an excess in demand(Orshortage in supply) of oq3-oq2 units. In such a case the price should rise butit can’t because of the price maximum.

The monopolist would thus have to sellits output on a first come, first served’ basis, or some sort of rationingsystem will have to be organised for those who desire the good and can affordto pay for it.Alternatively a government can adopt an RPI-X formula(As in the UK withprivatised industries), which provides an incentive for monopolies to be asefficient as possible. If the monopolist reduces its costs below X themonopolist can still make large profits. If the monopolist does not succeed indoing so a loss is inevitable. Monopolies are thus forced to cut costs ifprofits are to be attained.

There are however various problems with regulation. Since the government givesthe regulator power to implement decisions. Who is to say that the regulator’sperception of the public interest coincides with the government’s?(Since thegovernment acts in the public interest, or is supposed to anyway.

) Moreover,regulation is very complex and difficult especially with large powerful firmswhich exert political influence. There is thus a danger of regulatory capture.This is where the regulator is persuaded to operate in the monopolists’ interestrather than in the public interest. Regulatory capture may be due to corruptionor due to regulators actually believing the managers point of view.