Question

One reason that government might regulate business is to control excessive competition. Government also regulates business to control natural monopolies. Which situation is worse? Monopoly or excessive competition?

Answer 1

Comparing the situations of monopoly and excessive competition, the situation of monopoly is worse. This is because unregulated monopolist can charge very high prices in the market and sell less quantity as compared to a competitive firm, this leads to the deadweight loss in case of monopoly which reduces overall welfare in the market. On the other hand, competition will lower the price and increase consumer surplus in the market, benefiting consumers and also the deadweight loss in case of excessive competition is less than the deadweight loss in case of monopoly. Competition also induces producers to improve their productivity and reduce prices. Thus, it can be stated that the situation of monopoly with no competition in the market is worse than the situation of excessive competition.