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Discuss The Available Policy Options That A Government Has To Regulate Monopolies

  • 14th May, 2019
  • 11:45 AM

Monopoly, also known as a social evil is a system where there are no rival competitors, the manufacturer does not produce goods at full capacity and usually charges high price. This results in inequality of income. To protect the interest of consumers, the government regulates monopolies in the below manner:

  • Liberalization: Government deregulates the market so that new firms can enter and compete with the existing monopoly
  • Takeovers & Mergers: To prevent a creation on new monopoly after the merger/ acquisition of two firms, the government has to intervene.The government is concerned more about horizontal mergers (Companies in same industry) than vertical mergers. Horizontal mergers increases the monopoly in a particular industry and hence government introduces policies to stop monopoly creation through mergers and takeovers
  • Price Capping: This involves limiting the price a company can charge for a particular good or service. In the below diagram, you can clearly observe that price capping reduces monopoly profits. Price capping is done to curtail the power of natural monopolies. 
     

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  • Break up existing monopolies:The government may curtail the progress/ growth of the monopoly firms.

Explain, using an appropriate diagram, how the market for television soccer/football channels would be affected given a new advertising campaign for those channels featuring a star player such as David Beckham.

Advertising usually increases product awareness and thus might help in shifting the demand curve to the right. Thus firms spend on advertising with a hope on increasing demand and thus increasing sales. The below graph describes this phenomenon in detail.

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David Beckham is a star football player. In his 20 years of career, he has won 19 major trophies. He has global fan following of more than 200 million social media follower. Thus David Beckham has a strong personal brand who can influence the decision making of his followers.

If a star retired player like Beckham is advertising for soccer/football channels, it will make his followers to desire to watch those channels, resulting in higher Target rating point (TRP) for those channels. However, the channels have to factor in the increase in revenue and profit Vs. the cost incurred on hiring David Beckham to advertise.

Evaluate the effects of a subsidy to the clean energy industry. 

To reduce environmental impact, governments have introduced subsidies to promote clean energy especially European countries. These subsidies are financed by borrowed money or taxation. 

As can be seen from the below diagram, subsidy causes outward shift in supply curve resulting in reduction of equilibrium price. Thus, boosting demand for renewable energy. Thus providing subsidy should be beneficial for the clean energy industry.

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However, the government has to ensure the subsidies are used efficiently to achieve the target.  Below points should be taken into consideration:

  • How will the market be impacted? Which companies will gain/ lose from the subsidy? How to reduce negative impact?
  • How long can the government provide subsidy and what is the the plan to achieve economies of scales for companies to start functioning without subsidey?
  • Is subsidy protecting the inefficient firms and thus resulting in no/ less benefits to the consumers?
  • How to prevent fraud?
  • Are there any alternatives apart from providing subsidies to promote clean energy?

Evaluate the implications of YED for commodities and manufactured goods in relation to economic growth of a country.

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Commodities

Commodities like mining and agriculture products tend to have a low YED as the income rises. Even if the economic growth is higher and there is increase in per capita income, there is a limit to how much commodity products (eg: fruits, vegetables) a customer can buy. Hence there is a small rise in demand for commodities with economic growth of a country.

As can be seen from the below diagram, for commodities, the demand shifts to the right but not much.

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Manufactured Goods

With increase in GDP, the demand for manufactured goods increases and hence it has high YED. As consumers become better off, there tends to be higher increase in demand for travel, furniture, household equipment and other manufacturing products. Hence with rising income, the manufacturing sector grows more rapidly compared to the commodity sector.
 

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