Government Intervention to Correct Market Failure from Monopoly Power

Evaluate Advantages and Disadvantages of Various Methods of Government Intervention to Correct Market Failure Arising From Monopoly Power
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Introduction
Market powers and market failures are detrimental to the economy. First, market powers lead to undesirable escalation of the market price. This reduces the desire for products and amenities, thus causing undue economic difficulty. Second, market collapse induces an in effectual distribution of the rare assets. The market is incapable of regulating the abuse of the monopoly influences. Besides, market debacles contribute to an inadequate supply of goods, thus leaving the infinite human wants ungratified. It also deters the establishment of markets, and creates market insecurities (Hamel et al 2015).
The authority formulates policies to control market influences and debacles. Also, the government strategies facilitate the establishment of fresh businesses in the country. The dominations generate an inflexible demand loop, thus limiting the quantity of goods available and producing excessive burden to the country’s budget. This paper explores the advantages and disadvantages of various government policies enacted to rectify market failures due to the monopoly powers. It explains three government interventions, and discusses each concept, examples, strengths and weaknesses of the three regulations.
Market power is a state where a company escalates the market fees of its items to maximize the income above the minimal expenses. It occurs in circumstances where a dominant business organization enjoys monopoly supremacy. On the other hand, deadweight loss refers to an economic inefficiency due to unrealistic and imbalanced market situation. There is an unproductive distribution of properties and facilities in the market failures. These economic conditions decrease the public wellbeing (Hamel et al 2015).
2.1. The Price Capping Act
The government of the United Kingdom has formulated a law to avert the misuse of the market dominance in the cases of a normal monopoly or extraordinary entrance obstacle. This policy is geared towards price decrease, and deterring a great rate of the value limits. The price capping compels the monopoly businesses to implement fees that are lower than the revenue exploiting charges. For instance, the United Kingdom utilizes the retail price index less the predictable efficacy savings formulation (Crampes, &Laffont, 2016).
2.1.1 Analysis of the Price Capping Act
The government has established price-monitoring organizations to regulate the water and energy sectors in the country. These corporations apply the retail price index minus the predictable efficiency, saving criteria to curb the unnecessary price upsurges. A company can raise the prevailing market price by subtracting the expected quantity of price from the existing inflation rate. That is, subtracting 1 percent from 3 percent if the inflation rate is 3% and the predictable efficacy saving is 1%. Consequently, the company will increase the real fee by 2 percent, according to this act (Crampes, &Laffont, 2016).
Additionally, the supervisory organization can set a high efficacy saving value when the monopolist is able to achieve the expected efficacy saving, or overpricing its products. However, the corporation applied another criterion in the water sector. This involves subtracting the quantity of the venture the water company wishes to execute from the trade fee token (Crampes, &Laffont, 2016).
2.1.2Advantages of the Price Capping Act
The watchdog can fix price upsurges contingent on the condition of the trade and the prospective competence economies. The organization has formulated a criterion of defining the fee to be levied on the customers. The proportional changes in the retail price less the prospective efficacy economies govern the escalations of the acceptable market fees (Claude et al, 2016).
Also, the policy enables the monopolists to maximize their proceeds through minimizing the expenses by a value greater than the prospective effectiveness economic value. This allows the business organizations to be self-efficient without exploiting their customers. Besides, the input cost is significantly reduced, thus increasing output without the need of escalating the prevailing market fees (Claude et al, 2016). This streamlines the economy, hence preventing misuse of the monopoly powers by companies based in the United Kingdom.
Similarly, the law replaces business rivalries. The strategy substitutes a healthy business competition, which poses challenges to the monopoly traders, thus barring them from exploiting their influences (Claude et al, 2016). The monopolists therefore compete with the established regulation to ensure compliance, lower production costs and maximize revenue without overpricing their products.
2.1.3Disadvantages of the Price Capping Regulation
It is expensive and challenging to determine the anticipated efficacy saving value. It requires a noble method of predicting the possibility for an efficiency upgrading. The authority has invested heavily in terms of the human and financial resources. This is because statistical data is required to determine the expected productivity, saving level of a business organization (Sappington, & Weisman, 2016). Also this regulation creates a deadweight loss in the economy. The government fee restriction crafts deficits in the market. The demand for the goods surpasses the supply, thus causing scarcity. In addition, the income of the monopolists is reduced by the market fees ceiling. Consequently, an extreme economic liability is created, thus reducing the societal welfare.
Some monitoring authorities are corrupt and biased. They are lenient to the monopolists thus allowing them to overprice, and generate great earnings. The watchdog body, therefore, benefits from the kickbacks from the business companies to the disadvantage of the poor consumers. This contravenes the consumer rights through unnecessary price escalations. This concept is best explained by the regulatory capture theory which emphasizes that the controlled companies manipulate the controlling authority to take the advantage of making high revenue without complying with the law. This compromises the public welfares in favor of the firm (Sappington, & Weisman, 2016). Equally, the supervisory organizations may be too stern to the monopolists. They then pass tough regulations in the process of capping the market prices. This policy can contribute to loss making, thus reducing the company’s income level. Consequently, they may suffer from business collapse.
2.2. The Competition Policy
The government of the United Kingdom has legislated parameters to safeguard the interests of the customers and curtail the market botches due to monopoly influences. The act provides for an establishment of a regulatory authority to examine the amalgamation conducts and misuse of the market domination. It also provides for the government regulation of any companies with an aim of amalgamating (Whish, 2016). The authority can permit or deny the integration of the business organizations, according to this act. The fresh corporation enjoys dominance if the quotas rise by over twenty five percent. For instance, the competition body in the United Kingdom investigated the integration of HP Foods and Heinz Company. The Agency of Rational Dealing transferred Heinz's 470 million British pounds purchase of HP Foods to the Competition board when it realized that the joint entity will monopolize the economy (Whish, 2016). The public i...