Policies to control monopoly

• What are the policies to control monopolies?

  • price regulation
  • Profit regulation
  • quality standards
  • performance targets
• Give details about profit regulation as a way to control monopolies:

  • The government sets a level of profit such that the monopolist makes no more profit that if the industry were competitive.
  • This is done by calculating what should be the operating costs of the monopolist and adding a rate of return on capital employment.
• What are the problems of profit regulation?

  • imperfect information - government doesn’t know the costs & rate of return within the industry, so how can they set a profit cap?
  • monopolists have little incentives to cover their costs
• Give detail about quality standards & performance standards as a way to control monopolies:

  • Monopolists are profit maximisers and do not worry about quality, therefore, the government can intervene by setting quality standards.
  • E.g. the Post Office has a legal obligation to deliver letters to rural areas despite the fact that deliveries to rural areas are loss making.
  • The government sets targets for a variety of different outputs form a firm.
  • E.g. trains are given a target from the percentage of trains that arrive on time.
• What are the limitations of government intervention?

  Regulatory capture - firms operate in favour of the producers and not consumers.