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How To Control Monopolies

1. There are several ways governments can control monopolies, including setting maximum price legislation, quality and standard controls, controlling stock during shortages, removing barriers to competition, imposing lump sum taxes, and establishing oversight bodies. 2. Monopolies can provide some benefits like encouraging technical progress through dedicated research budgets, better resource exploitation through large scale production, and lower costs through economies of scale in industries with high fixed costs. 3. However, monopolies can also lead to unequal distribution of income as profits are distributed to shareholders, and some consumers may be exploited through higher prices. Oversight is needed to balance these effects.

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3K views

How To Control Monopolies

1. There are several ways governments can control monopolies, including setting maximum price legislation, quality and standard controls, controlling stock during shortages, removing barriers to competition, imposing lump sum taxes, and establishing oversight bodies. 2. Monopolies can provide some benefits like encouraging technical progress through dedicated research budgets, better resource exploitation through large scale production, and lower costs through economies of scale in industries with high fixed costs. 3. However, monopolies can also lead to unequal distribution of income as profits are distributed to shareholders, and some consumers may be exploited through higher prices. Oversight is needed to balance these effects.

Uploaded by

Sharma Gokhool
Copyright
© Attribution Non-Commercial (BY-NC)
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Download as DOCX, PDF, TXT or read online on Scribd
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How to control monopolies?

1. The extent to which monopolists can charge high prices and earn hug profits is
limited by the possibility of new substitute’s product being produced and also by the
possible entry of new firms into the industry. Thus a good safeguard against
exploitation by a monopolist o keep industries open to new firms and new ideas
2. Legislate in favour of the public interest
 Maximum price legislation can be set to make it illegal to raise prices above a
certain level
 Quality control and standard control can be set by the government department
concerned
 Stock can be controlled in times of acute shortages and those monopolists who
do not abide to the law can be made to pay fine or even sentenced to
imprisonment
3. Another way of tackling the problems of monopoly is to remove the barriers, which
prevent the growth of competition. New permits and licences can be issued to
prospective/potential producers. The formalities and administrative procedures can be
made more flexible to encourage the entry of new firms. Moreover if a domestic
monopoly is protected from foreign competition by existence of a tariff, which
restricts imports, the government might reduce or remove this tariff.
4. The government can also impose a lump sum tax (fixed tax, such a tax would not
place unnecessary burden on the consumers and it has no effect on the monopolist’s
price and output. The main aim is to remove away part of the monopolist’s profits.
This is seen in the diagram below. Equilibrium output and price is unchanged after the
imposition of the lump sum tax. The effect of the lump sum tax is seen in the new
average cost curve. A higher total cost means a higher average cost curve. With the
new average cost, profit level is reduced.
 Before the imposition of the lump sum tax, original equilibrium price and output
are OP and OQ respectively
 After the imposition of the lump sum tax, total profit is reduced from area EPRF
to area SPRT, area ESTF represent the profits, which has been removed by the
government. However price and output does remain unchanged
 Basically , the lump sum tax does not solve the problem of allocative
inefficiency , it only helps in redistribution of profit from the monopolist to the
government
5. The government can set up a separate body or institution which will be given the
responsibility to control the activities of monopoly firms. For example, institutions
like standard bureau and Monopoly and Merger Commission have the right to control
monopoly activity and to take necessary actions if the need arises.
6. The private monopolist who is profit motivated can be brought under public
ownership and control such that the objective will be shifted from profit maximisation
towards welfare maximisation and the public sector monopoly will operate at that
point where price=mc( i.e. adopting the techniques of marginal cost pricing)
7. The government can give more power to the association of consumers through the
setting up consumer protection act ( CPA) to allow the association to perform its
activities properly and effectively to ensure that the welfare of consumers is
maximise.

Benefits of monopoly

1. Certain projects can only be operated by a monopolist. This is particularly true of


public utilities such as water, gas and electricity. If such projects are left to the private
sector initially there may be cut throat competition, duplication of services, waste or
unnecessary inconvenience to the public. To prevent duplication of services, it is
found to be desirable for such projects to be undertaken by monopolies. Under
monopoly there is relatively less resource used than under competitive market. When
there is competition many firms will be engaged in producing broadly the same
commodities. Each firm will require a given amount of land, labour and capital.
Resources are scarce and we should make a rational use of it, and under monopoly we
require relatively less resources than under competitive market.
2. When there is a single supplier much of waste of competitive advertising is
eliminated. Advertising may be limited only to the dissemination of information i.e.
advertising would only be informative

3. There is much support for the view that monopoly organisation encourages technical
progress. A monopoly is more likely to have the resources required for research and
development. In addition, the monopolist has more incentive to innovate since his
secure market ensures that he obtains all the gains from any successful new product or
any new production technique.
4. Monopoly may lead to a better exploitation of natural resources. National resources
can be exploited to the best technology advances only if one production unit is very
large, and the monopolist may be in a better position to employ heavy and expensive
machinery.

5. An important issue is what happens to the monopoly profits both in the short run and
the long run. Undoubtedly some of the profits will be distributed to shareholders as
dividends. This raises questions of equity. Some low income consumers might be
exploited by the monopolist because of higher prices. And, some of their purchasing
power might be transferred via dividends to shareholders in the higher income
brackets - thus making the overall distribution of income more unequal.
However some of the supernormal profits might be used to invest in research and
development programmes that have the potential to bring dynamic efficiency gains to
consumers in the markets. There is a continuing debate about whether competitive or
monopolistic markets provide the best environment for high levels of research
spending.

6. If the firm produces in an industry with very high fixed costs, consumers can benefit
from a large firm which can exploit economies of scale. Economies of scale lead to
lower average costs and therefore the potential of lower prices. Example:
Would you want several firms providing tap water? Would it make sense to have 2-3
companies laying a network of water pipes and sewage systems across the country?
No. It is better to have 1 firm. This is an example of an industry which is a natural
monopoly.
Industries like car production and airline production also have significant economies
of scale so it makes sense for firms to have some degree of market power. However,
just because a firm has monopoly power doesn’t mean that the industry necessarily
has economies of scale or that lower average costs lead to lower prices.

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