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Natural Monopoly: Privatization and Regulatory Policies

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Think about a firm that has been a state-owned, natural monopoly. If it is privatized, what kind of regulatory policies could the government follow, and what impact might they have on the firm?

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Natural Monopoly: Privatization and Regulatory Policies

A natural monopoly is described as an industry where the fixed cost of the capital goods is extremely high and it is not profitable or feasible for another firm to enter the industry and participate in the competition. A natural monopoly exists due to the reason that the economies of scale need one, instead of various firms. In such a situation, small-scale possession would be less proficient. Generally, the natural monopolies are the utilities including the electricity, water and natural gas (Foldvary, 1999).
For example, it would be really expensive if a second set of water and sewerage pipes in a particular city is built. The delivery service of water and gas holds a low variable cost and a high fixed cost. For preventing the utilities from exploiting their monopolies by charging very high prices, they are regularized by the government. Normally, they are allowed for only a fixed percentage of profit over the cost. However, since the monopoly is assured a profit, this kind of regulation can result in unproductive high costs (Foldvary, 1999).
If a state owned enterprise is privatized, the government could follow some regulatory policies for ensuring effective performance of the company and ensuring a control over the prices charged by the company. Since, it is a natural monopoly, when it will be privatized, it will try to increase the amount of the profits through high prices of its services or products.
The basic aim of the state owned enterprises is to serve the public and fulfill their needs of basic utilities by charging reasonable prices; they do not operate to earn profit, however, the private enterprises aim at earning a good amount of profit by offering services to the customers. In order to promote regulation, market-based competition should be introduced to a level as much as possible before the process of privatization. When it is difficult to introduce competition, regulation should exist for safeguarding the rights and interests of the consumers and ...

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  • MBA (IP), International Center for Internationa Business
  • BBA, University of Rajasthan
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