Question

What might be the purpose of government regulation of natural monopolies

Answer 1

The purpose of government regulation is to encourage and facilitate competition.

Step-by-step explanation:

Natural monopolies generally occur because the costs of initiating operations is really high, but once the company is running, economies of scale reduce costs significantly. The classic examples are utilities where it takes an extremely large investment to start a company, but once the company is running the cost to service clients is minimum due to economies of scale.

This is one reason why most utilities are public services, since the initial investment required is large, but then the customers are tied to the utilities companies.

The barriers of entry for natural monopolies are not imposed, they occur naturally due to high initial costs. When the service provided by natural monopolies are essential, e.g. utilities, the government usually takes care of them. But other times, natural monopolies occur in other scenarios, e.g. Microsoft with Windows.

Basically Microsoft holds 88.4% of the world market for pc operating systems, Apple's OS trails far behind with 9.4% share. Windows dominance is not because they offer the best system, they are simply so large that only Apple has dared to challenge them. Many times different governments have fined them with several billions of dollars, but their business is so lucrative that they pay it and keep doing as they want.

The only effective way to deal with natural monopolies is to regulate them and most of the times make them public services.

Answer 2

Government regulate natural monopolies to avoid a situation where it exhorts the consumers by charging high prices

Step-by-step explanation:

Natural monopolies are monopolies that exist due to high capital outlay required in the business sector of the economy or because they are able to produce at very low cost per unit(high economies of scale) which makes it difficult for rival firms to enter the industry let alone compete with them.

Consumers would be left at the mercy of these monopolies if the government refuses to intervene by a way of regulation especially by setting a maximum price such that consumers are not burdened with paying beyond reasonable price for their product or service offering.