Economics for Business Business Monopoly

Question: Describe about the Economics for Business of Business Monopoly. Answer: Introduction: Natural monopoly takes place when the most effective set of firms in the industry is one. Thus, the natural monopoly will significantly have higher incidence of fixed cost, which represents an impractical situation of having more than one organisation producing the goods. One of such examples of natural monopoly is the use of tap water. It is however sensible to have just one business rendering a system of water pipes and sewers since there are higher incidence of capital cost incurred in establishing the national system of pipes and sewage systems. It is noteworthy to denote that natural monopolies are considered as un-contestable and firms operating under such environment does not faces any competition. Hence, without the intervention of the government they could misuse the market control and set higher prices. Natural monopolies usually require government regulations and government can wish to regulate the monopolies by protecting the interest of the consumers. Analysis: The major problems associated with the monopolies is that a monopolistic firm is left to its own consensus and is most likely to produce the outputs, which are of lower quantity and charge higher price. Hence, a monopolist generally produces the output where price is relatively higher than the marginal cost highlighting a situation of under apportionment of resources in the direction of the product. Thus, by restriction the output and increase the price of the product the monopolist is guaranteed of higher profits, which is at the cost of community and consumer welfare. However, the prices of a monopolist is determined by the quantity of output that could yield a greater profit. The same can be elaborated with use of diagram given below. Figure 1: Economic Profit Diagram (Monopolists Profit Maximization Price and Quantity) (Source: Hubbard, Garnett Lewis, 2012) Regrettably, in certain industries due to wide range of productivity over which the economies of scale is felt and on few occasion only one firms makes the most of such situation. Government regulators are usually up with the problems of dealing with the natural monopolistic businesses such as power industry. It should be noted that an electrical company would base its price and output decision in the market to maximise the profit based on the law that all unregulated firms manufacture at a degree where their marginal revenue is equivalent to the marginal cost. For example, monopolies have the supremacy in the market to set prices greater than the competitive markets. Hence, government can control price through using price capping, yardstick competition to prevent the development of monopoly influence. The problematic situation arises for the monopolist that its marginal revenue is lower than the price charged, which it should be charging. This represents that at the profit maximising level of output, the marginal cost would be less than the price, in other words, not adequate quantity of energy will be manufactured and the cost will be very high for some of t he customers to afford (Hubbard, Garnett Lewis, 2012). This paves the way for government regulations. The government regulation in a natural monopoly can be clearly explained well in the diagram below as below the efficient price, it will suffer a loss. Figure 2: ATC Pricing (Regulating a Natural Monopoly) (Source: Case, Fair Oster, 2012) A government regulations is concerned with providing the correct quantity of electricity among the correct set of individuals and it may choose to set price ceiling for electricity at the level where price is equivalent to the organisations marginal cost. In the likelihood of the situation, the organisations average total cost will ultimately decline over a wider range of output. This would represent a scenario which leading to loss for firm and might lead to failure of the business with shut down. Under such circumstances most of the government introduce the method of price ceiling where prices are equivalent to the firms average total cost, which represents the firm, is operating at break-even point. Under the breakeven point, the firm would be earning normal profit, which is essential to keep the organisation in the business representing fair return price. The impression of deregulation of electricity marketplace was to eliminate the price ceilings, which might lead to better economies of profit for companies. This will subsequently help in attracting new companies in the market and will promote competition. With highly competitive markets prices falls to the optimal level, which ultimately benefits the consumers and producers and forces them to be more product oriented to compete in the market. Reason behind the government regulations towards monopolies: Without the intervention from government regulations firms may monopoly the price by overstating it. These monopolies would lead to a locative inadequacy and sharp fall in well-being of customers. On the other hand, an organisation having the control over the facility of a specific facility it may possess little inducement to provide a respectable quality service. Government regulations can safeguard that the organisation meet the required minimum standard of service (Varian, 2014). It is noteworthy to denote that in some of the businesses, it is conceivable to promote competition and consequently there shall be less number of government regulations. However, due to economies of large scale, the number of most well-organized companies is one and government is unable boost competition, as it is vital to control the firm in order to avert the misuse of monopoly power. Government policies may help in restricting the formation of monopolies by eliminating the barriers to entry and application of antitrust law. It is noteworthy to denote that a natural monopoly has increasing return to sales and a single firm can provide service to the entire market at the lowest cost. However, under the natural monopolies, the monopolist produces output, which is equal to the marginal cost creating a dead weight loss. In order to reduce the dead weight loss government regulates the price of firms by forcing them to apply the concept of average total cost or acting itself in the form of benevolent. As the monopolies have created a deadweight loss, government may remove the barriers to enter into the market by using the monopolies to break up the deadweight. It should be noted that due to economies of large scale a natural monopoly has lower average cost with the increase in output. Another method adopted by the government to regulate the monopolies is directing the m onopolist the amount of price to be charged. Government may force the monopolies to price their product at marginal cost or at average total cost. The theory of marginal costing pricing techniques helps the government to eliminate dead weight loss however; it is difficult to calculate and often requires monopolies to function at loss. On the other hand, the average costing pricing techniques may result in some kind of dead weight loss but it is easier to compute the firms breakeven point. Figure 3: Falling Average Cost Curve of natural monopoly market (Source: Hubbard, Garnett Lewis, 2012) It is evident from the figure that the regulating authority can set the price even lower price which is equal to the Average cost rule where P = AC. This occurs at point E. The monopolist sells a unit of output at the price equal to OP. under such circumstances the monopolist yields normal profit, which it takes into the consideration of cost structure. Several economist opinion differs whether such returns would be termed as fair in economic context (Varian, 2014). Any kind of wrong judgement would lead to long term ineffective apportioning of resources and losses. The monopolist under such circumstances would not increase the output beyond certain level where there is a probability of incurring losses. Since natural monopolist, largely benefit from economies of large scale. Long run marginal cost is more likely to be less than the long run average cost in the relevant framework of output. In such case, the marginal cost pricing can lead to losses to the monopolist. Price regulations: As it is evident with all the monopolies, a monopolist who has acquired the position through natural monopoly effects might engage in such activities which involves the abuse of market power which often lead to calls for price regulations from government. Government regulations may arise at certain circumstances where business request to enter in the new market which is dominated by a natural monopoly. One of the common aspects involved in favour of the arguments is the need to restrict the companys ability to abuse the power or to facilitate competition, increase investment and stabilisation of market (Case, Fair Oster, 2012). The analysis is true in context to the essential electricity where a monopoly creates a situation of captive markets for products, which few can refuse. In common practice, price regulations occurs when the government believes that if the company is left to exercise his own device, would ultimately behave in such a way which is against the consumers interest. In some of the countries, an early solution to these perceived problems is the government provisions that allows the ability of the monopolist to regulate price that have devastating impact on the society. As it is explained in the study that the marginal cost of the natural monopolist is lower than the average total cost (Varian, 2014). It is noteworthy to denote that such kinds of price discrimination favouring the less affluent and against the more wealthy customers may under such circumstances enable the less to gain natural monopoly at lower rate than those that corresponds to the average total cost. The chief characteristics of natural monopoly is that its average total cost falloffs on a continuous basis over any number of amount demanded by the market. For example if a business has big amount of cost, which are fixed, then a solo firm can offer the goods at a very low cost than more number of organisations. This is due to the average total cost of each of the firm would be much higher in comparison to the natural monopoly. An environment of natural monopoly can deliver goods and service for a lesser amount if there is no such rivalry. An example of electricity has been cited as one of the natural monopoly in the market. Figure 4: Inefficiency of a natural monopoly (Source: Case, Fair Oster, 2012) The theory puts forward the question of price, which is required to be duly put in place the natural monopoly. Firms operating under competitive environment, revenues can be maximised under the circumstances when marginal cost is equal to the market price. It is noteworthy to denote that since the average total cost of a natural monopoly drops on a constant rate hence, the marginal cost will always be less than that of the average total cost (ATC). As the average total cost is the aggregate of all cost, which includes a large number of cost, which are fixed whereas the marginal cost represents the additional cost, incurred for producing an extra unit of output. Therefore, a natural monopoly will constantly lose cash if the amount that is charged is restricted to the marginal cost (Pierk Weil, 2016). A highly-regulated amount would be the one that allowed the monopoly to charge an amount, which is at times denoted as the equitable return price and is equivalent to the average total c ost. Such practice would allow the natural monopoly to survive in the form of regular business however; it will not incentivize the proprietors to cut down the rate. Hence, this type of regulations can be improved by letting the monopolist to retain a portion of their revenues produced by decreasing the cost. Conclusion: To conclude with it can be observed that marginal cost price is decided by the marginal Cost. The study highlights that monopolist will produce in the long run and charge high price unless the government undertakes the initiative to set price in order to cut down the natural monopoly. The government may act to choose be benevolent monopolist itself however it may be best to suit efficient running of the business. The study clearly defines that government can regulate price through using price covering, yardstick competition to avert the progression of monopoly power. In the likelihood of the situation, the businesses average total cost will eventually decline over a wider range of output. The study defines that under such scenario the profit maximising level of output, the marginal cost would be less than the price. With the adoption of pricing strategy, government may help in restricting the formation of monopolies by eliminating the barriers to entry and significantly promotes a pe rfectly competitive market. Reference List: Case, K. E., Fair, R. C., Oster, S. M. (2012).Principles of economics. Prentice Hall. Hubbard, G., Garnett, A., Lewis, P. (2012).Essentials of economics. Pearson Higher Education AU. Pierk, J., Weil, M. (2016). Price regulation and accounting choice.Journal of Accounting and Public Policy,35(3), 256-275. Varian, H. R. (2014).Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton Company.