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Economics explained


Market failure

Approaches to the problem of monopoly

Approaches to the problem of monopoly

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There are two reasons why governments are keen to crack down on monopolies. The first is that they believe they act to the detriment of consumers, charging them higher prices than if there were lots of companies competing for custom. The second is that lack of competition is seen to be damaging in another way.

Breaking up a monopoly into several competing firms

A solution to the problem of a monopoly is to destroy it by breaking it up into many competing firms.

Competition policy

As its name implies, competition policy is the part of government economic policy which tries to make the imperfectly competitive and monopolistic markets of the real world more competitive. The aims of competition policy include preventing the exploitation of monopoly power, reducing costs of production, improving efficiency, getting rid of excessive profit so that prices reflect costs of production, and removing entry and exit barriers that separate markets.

Taxing monopoly profits.

As well as controlling prices directly the government can tax monopoly profit to punish firms for exploiting their monopoly power and making an excessive profit.

Other methods to restrict monopoly abuse are the removal of barriers to entry, privatisation and price controls.

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