Question

3. (3) From Chapter 9: Explain the methods that are available to the government that can increase the well-being of a society if there is a natural monopoly market.

Answer 1

First we should now, why there is requirement of government to raise well being of a society in monopoly. Monopoly tends to sell goods at a higher price and less quantity than the optimal quantity which reduces the overall welfare. You can refer in the below diagram where portion A + B is the reduction in total welfare from monopoly.

Pril hedonon mc ture --- lerfectly competitie DEAR Output MR

In the below diagram, monopoly operates at point E (Marginal revenue = Marginal cost) where price charged is P1 and output traded is Y1 while perfectly competitive operates at point E1 (Marginal cost / Supply curve = Demand curve / Avearge revenue) where P2 is price charged and Y2 is output produced.

a) If government reduces the taxes on producer which will shift their MC curve to its downward sa in above diagram shared to MC1. It will shift the monopoly trading point to E2 where the economy produce Y2 level of putput and price charged is P2. It will raise the welfare and vanish the welfare loss equal to A+B.

b) If government adopts marginal cost pricing policy where price charged by monopoly is equal to marginal cost, economy will automatically shifts to point E1 and reduce welfare loss.