Economics 4e HomeEconomics In The NewsSite MapGlossaryContact UsSmartWork
Chapter123456789101112131415161718192021

Chapter Review Chapter 13: Government Policies Towards Competition

  1. Economists have identified four major problems resulting from monopolies and imperfect competition: restricted output, managerial slack, lack of incentives to make technological progress, and wasteful rent-seeking expenditures.
  2. Since for a natural monopoly average costs are declining over the range of market demand, a large firm can undercut its rivals. And since marginal cost for a natural monopoly lies below average cost, an attempt by regulators to require it to set price equal to marginal cost (as in the case of perfect competition) will force the firm to make losses.
  3. Taking ownership of a natural monopoly enables the government to set price and quantity directly. But it also subjects an industry to political pressures and the potential inefficiencies of government operation.
  4. In the United States, natural monopolies are regulated. Government regulators seek to keep prices as low and quantity as high as is consistent with the natural monopo¬ list being able to cover its costs. However, regulators are under political pressure to provide cross subsidies and are prone to being "captured" by the industry they are regulating.
  5. In some cases, potential competition may be as effective as public ownership or government regulation at keeping prices low.
  6. Antitrust policy is concerned with promoting competition, both by making it more difficult for any firm to dominate a market and by restricting practices that interfere with competition.
  7. Under the "rule of reason," companies may seek to defend themselves from accusations of anticompetitive behavior by claiming that the practice in question also leads to greater efficiency. In such cases, courts must often decide whether the potential efficiency benefits of restrictive practices outweigh their potential anticompetitive effects.
W.W. Norton and Company College Home Page