![]() Should the government choose to intervene, it has a number of measures available with which to force the privately owned monopoly away from private profit maximisation towards the socially desirable equilibrium. A monopolist operates in the most imperfect market that can exist. This would imply that only perfect competition is socially desirable, yet the majority of New Zealand industries sell in an imperfect market. Firms will maximise profit where MC = MR, and, with a downward sloping demand curve, MR is always below AR. The socially desirable equilibrium quantity occurs when MC= AR. ![]() Socially Desirable Monopoly Equilibrium and Government Intervention The government is the provider of the fibre roll out for broadband to ensure no one provider can monopolise the fibre network The government separated the lines / transmission part of electricorp from the electricity generator part to help ensure one electrcity company couldn't take advantage of being the only transmitor of electrcity.Ĭhorus was separated from Telecom to stop Telecom over charging other firms from using its telephone lines. The government can also separate the natural monopoly area of the firm to ensure it can't take advantage of its market position. ![]() Once demand increases and economies of scale start to appear the government may then sell off the natural monopolies. Then the government may provide the good / service, especially where very high startup costs are involved. No rational, privately owned business could stay in business under these conditions.īut what if it was considered socially desirable for the economy to have this product or service? Suppose it was a nationwide energy grid that would boost economic growth? The Social Desirability of Natural MonopoliesĪ rational producer will not incur unsustainable losses - it will not operate below the AC curve in the long run nor the AVC curve in the short run.Ĭonsider the following situation, where Price (P) is below AC. A NATURAL MONOPOLY is a firm that has economies of scale throughout the production range due to extremely high start- up costs, meaning that the AC curve is declining throughout the production range and MC is insignificant for each additional unit of production.Ī Natural Monopoly can supply the market more efficiently and at a lower cost than two or more firms.Ī Natural Monopoly may be more efficient than a perfect competitor because of the very high start up costs it may be inefficient for more than one firm to supply the market.
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