Government Intervention

Government Intervention with a Monopoly

Ways the Government can Correct Monopolies:

1. Anti-Trust Laws - Trying to make the market more competitive. Example: Preventing two big companies like Coke and Pepsi from merging.
2. Public Ownership - The government takes ownership of the business Example: In many European countries, the government owns and operates utilities like water, electricity, and postal service.
3. Regulation - This could be a way of making monopolies lower their prices. Example: Marginal-Cost Pricing for a natural monopoly

Marginal Cost Pricing

• A natural monopoly (like Walmart) always experiences economies of scale (when ATC is decreasing). This means marginal cost must lie

  below

  ---

  ATC.
• The government can force the firm to charge a price that is equal to the marginal cost. In the diagram above this would be at an output of

  100

  ---

• However, at this output, the ATC is

  50

  ---

  and the price is

  $40

  ---

• Since P < ATC (economic loss) it is usually not sustainable for the business.

Example: Government Intervention