Advantages And Disadvantages Of Monopolies

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2.- Monopoly regulation
Due to the market power monopoly has, it can set a price above its marginal cost of production, and so earn large economic price as it shows in the graph, (Economics on line).
The natural monopolist will charge Q and make super-normal profits, which could be excessive. So, the regulator must take actions to avoid this situation.

Pettinger (2010) explained the several ways the government can regulate monopolies:

1. Price capping by regulators

For many newly privatise industries, the government create regulatory bodies such as:

OFGEM - gas and electricity markets
OFGEM could limit price increases, with a formula RPI-X, being X the amount which they have to cut prices relative to the inflation. If for example RPI is 3% and X 1% the maximum level the utilities could increase price is 3%- 1% = 2%
In the last year in U.K. there have being a fierce pressure to apply a wide-ranging price cap on energy bills, which will be analysed
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(Pettinger T., 2010)
A) RPI- X regulation. (used in the energy sector)
Advantages:
1- The regulator can set price increase based on the state of the industry and potential efficiency savings.
2- Incentive to cut costs
Disadvantages:
1- Danger of regulatory capture, poor oversight of the companies regulated
2- Regulators could be very strict and don´t allow the companies making enough profits.

B) RPI+/- K for water industry Being K the amount of investment that the water firm have to implement.
The main problem in regulation is the regulatory capture – regulators are dependent on the utilities for the information on costs, and end up being overly sympathetic to those utilities. (Tarrant R., 2016).
The Commons ‘Public Account Committee (PAC) has criticised the UK water regulator for poor oversight of water companies, which have made gains of at least 1.2 billion pounds between 2010 and 2015 higher than
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