Chapter 77, Problem 2FRQ

To determine

Three different public policy approaches to monopoly

Explanation of Solution

Three different public policy approaches to monopoly are as follows:

1. Public ownership: Under the public ownership approach, the government-owned the corporation or assets to reduce the excess power of monopoly in the market. Under this policy approach, the government itself supplies goods and services in the market, or a firm which is owned by the government supplies the goods and services. For social well-being, the government also regulates prices in the monopoly competition to make the goods affordable for customers.
2. Price capping: In this policy, the upper limit of the price is fixed by the government to make the monopolized industry more competitive. Under this approach, the monopolized industry cannot charge a higher price than the maximum price which is fixed or regulated by the government. Moreover, under this approach of public policy, the government can also apply tax on the supplier or seller of the good.
3. Merger: According to this public policy approach, the merger is performed by the government between a public company and the monopolistic industry to regulate unnecessary competition or consolidate the less powerful company in the market. It removes the competition between merger corporations which in turn reduces the price of goods for customers in the market. Through this policy, the government can regulate the behavior of monopolies.

Economics Concept Introduction

Introduction: Externality problems such as pollution refer to the fundamental economic policy problems while firms do not internalize the indirect costs or indirect benefits from any of their economic transactions in the market. The quantity where all the costs and benefits are accounted for is called socially optimal quantity. A monopoly is a market structure where only one seller exists and he/she sells a unique product in the market.