Question

Briefly explain regulation in the case of a natural monopoly. Provide 3 common examples of regulation. Briefly discuss the benefits of privatization set out in the text and explain what is required for the privatization of a nationalized asset for privatization to work well?  

I need clearly 3 examples stated. Thanks in advance.

Answer 1

It shall be noted that a natural monopoly arises when average costs are declining over the range of production that satisfies market demand. This typically happens when fixed costs are large relative to variable costs.

The 3 common examples of regulation of natural monopoly are:

1) Public utilities - The public utility monopolies provide water, sewer services, electricity, and energy such as natural gas and oil to cities and towns across the country. The start-up costs associated with establishing utility plants and the distribution of their products are substantial. As a result, the capital cost is a strong deterrent for potential competitors.

2) Railroad company - The railroad industry is government-sponsored, meaning their natural monopolies are allowed because it's more efficient and the public's best interest to help it flourish. Further, the industry can't support two or more major players given the unique resources needed, such as land for railroad tracks, train stations, and their high-cost structures.

3) Telecommunication - It is a government undertaking and requires setting up a huge network infrastructure for proper signaling and transmission.

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Benefits of Privatization:

1) Improved efficiency - Private companies have a profit incentive to cut costs and be more efficient. If you work for government-run industry managers do not usually share in any profits.

2) Lack of political interference - It is argued governments make poor economic managers. They are motivated by political pressures rather than sound economic and business sense.

3) Short term view - A government many think only in terms of the next election. Therefore, they may be unwilling to invest in infrastructure improvements which will benefit the firm in the long term because they are more concerned about projects that give a benefit before the election.

4) Shareholders - It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the firm could be subject to a takeover. A state-owned firm doesn’t have this pressure and so it is easier for them to be inefficient.

5) Increased competition - The privatization of state-owned monopolies occurs alongside deregulation – i.e. policies to allow more firms to enter the industry and increase the competitiveness of the market. It is this increase in competition that can be the greatest spur to improve inefficiency.

6) The government will raise revenue from the sale

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For the privatization of a nationalized asset for privatization to work well, it is necessary that there is effective enforcement of the legal rights of private companies by the government.

The government shall provide adequate protection.

The government should keep privately managed nationalized assets from any kind of political interference

There should be an appropriate amendment in the regulatory acts to recognize privatization of the nationalized assets

The privately held share should be more than 51% in the nationalized assets so that the management and operation do not have any government interference.