Answer to Question #316319 in Microeconomics for Onhimb

Question

Explain the problem with imposing competitive pricing in the case of a natural monopoly.

Answer 1

Market competition will not work well in the event of a natural monopoly, thus rather than allowing an unfettered monopoly to raise prices and lower output, the government may choose to restrict price and/or output.

Price cap regulation is when the government regulates a company by setting a price level several years in advance. In this situation, the company can gain a lot of money if it can produce at a lower cost or sell more than planned, or it can lose a lot of money if expenses are high or sales are lower than predicted.