Answer to Question #125978 in Microeconomics for Hlonipho

Question

Government may prevent possible abuse of market power by these firms within the
industry. How would the government achieve this?

Answer 1

Governments may prevent possible abuse of market power by firms through regulation, taxation, and subsidies. Through regulation, governments prevent cartels and other organizations from raising entry costs, and preventing infrastructural development. They can also break up monopolies and regulate negative externalties like pollution to maximize social welfare. Additionally, taxation and welfare programs enable governments to relocate finance from the wealthy to the most needy. They can act through price ceiling to ensure that a product is affordable to many consumers. Governments set minimum prices to promote the production of certain commodities and ensure that producers have sufficient resources.