Natural monopoly and market regulation

What is a natural monopoly?

Where a single firm can produce a particular product or service at a lower AC than multiple firms could

When do natural monopolies arise

When economys of scale are so pronounced that average cost of production falls as firm increases output

What is it more efficient for?

! firm to be the sole provider of a specific good or service due to EOS

Why is there regulation to prevent monopolistic abuse in natural monopolies?

To ensure fair pricing, quality of service and accessibility of consumers 

How is National rail an example of Natural Monopoly?

Distinct from train provision companies, for firms to compete they would have to lay lines next to each other 

When does a natural monopoly occur?

When a single firm can supply at a lower LRAC than multiple firms. The MES is a high % of market demand

What does the shape of the LRAC curve mean for natural monopolies?

It is harder for smaller challenger firms to enter the market profitably

How can challenger firms join market?

By joining at retail level providing final mile services to consumers

What do high fixed costs do to LRAC?

Cause LRAC to fall continuously

Why do regulatory bodies exist?

To encourage competition, which is not effective solution to natural monopolies

What is price capping?

Allowing price increases each year, but are capped

What is RPI-X

Changes in average cost - the amount of productivity the regulator believes can be achieved

How do price caps discourage firms?

Discourages X inefficiencies because if costs rise, firms cannot pass them on to consumers, forcing them to find production gain and cost cut

What is Rate of return?

Setting a maximum % level of profit that monopolists can earn

What is rate of return also called

Tax on profits , preventing firm from making excessive profit

What does tax on profit allow?

Firms to make certain level of profit based on value of costs, innovation and capital investment

What do supporters argue about ROR?

Encourages firms to invest, as if more is spent on investment/capital, more profit retained

What is a disadvantage to ROR?

Firms are encouraged to limit profit and are penalised for success, X inefficiency is rewarded and may overstate capital value

What are performance targets?

Targets relating to output, quality, services and upgrades, set by regulatory bodies

What do performance targets require?

Significant will and understanding of industry to set correct targets and review regularly

Example of regulatory bodies?

ORR fined National rail £2million in 2015 for failing to meet upgrade deadlines for london bridge 

Why does the government intervene in markets?

To ensure consumer interests are not being ignored or acted against

What is the CMA and their role?

Competition and market authority- independent, wit aim to help businesses and economy by promoting competitive markets and tackling unfair behaviour

What is privatisation?

The selling of state owned assets to the private sector

What are the positives of privatisation?

Unrestricted operation of competition and market forces will increase economic welfare, more efficient allocation of resources. Lower costs as firms incentivised to cut costs. Proliferation of choice- increase consumer services, quality improvements

What are the negatives of privatisation?

Selling off the family silver - the govt selling off a firm for political reasons, as once it’s sold, there is an injection into the circular flow. Once a firm is sold, there is no way to get it back. Ownership only goes to shareholders, unintended conq and govt failure

What is deregulation and how does it affect the market?

Removing govt control from markets, making it easier for entrepreneurship. Aiming to increase supply, decreasing price

What is competitive tendering and how does it affect the market?

When a private sector firm submits a bid in order to build a government building. Lowest bidding firm gets the offer. Builders collude “big rigging”, anti competitive practise, hard to prove

What is encouraging small business growth and how does it affect the market?

Aiming to increase comp through training, grants, tax incentives/subsidies to keep firms in market. However, many not be able to match larger firm prices, destroyer pricing, illegal. Training + setting up will take time. May become reliant on subs- infant and sunrise industries may fail once subsidy is taken away

Intervention to protect employees

Assuming firms are profit maximising, firms wishes to pay employees as low a possible, So legal regs in place, I.e. minimum wage, heath and safety, redundancy and trade unions

What are limitations to intervention?

Asymmetric information, the way in which firms present themselves may vary in front of regulators. Regulatory capture, attempting to alter decisions, prevalent in finance

What is nationalisation?

Where a firm enters the hands of the government

What are positives of nationalisation

Places dependency on public interest rather than private profit, Social equality, as benefits generated are widely distributed. Increase is services quality and job security

What are the negatives of nationalisation?

Can lead to inefficiency and bureaucracy, as lacking incentives. Lack of innovation as are not driven by competition and profit. Risk aversion and misallocated resources

What is productive efficiency?

Producing maximum output at minimum cost. Found at lowest point of AC curve

What is allocative efficiency?

Where resources are allocated in a way that maximises consumer utility. Where MC= Price

What is X - inefficiency?

Where AC is higher than it potentially could be. Also known as organisational slack. Occurs when lack of competition and pressure

What is dynamic efficiency?

A firms ability to improve long term efficiency, when SNP is made