2.11.8 (HL)—Government responses to market power

Government may use legislation and regulation, government ownership or fines when significant market power is abused. The objective is to constrain harmful conduct or outcomes rather than punish firm size by itself.

Legislation can prohibit collusion or anti-competitive exclusion; regulation can control price, quality or access; government ownership can place a natural-monopoly service under public control; fines deter and penalize proven breaches.

Example

A utility regulator may cap a natural monopoly's price and set service standards. Competition law may fine firms that coordinate prices, provided investigation establishes the prohibited conduct.

Evaluate enforcement cost, regulatory capture, information gaps, incentives to invest, service quality and consumer outcomes. Merger control or structural separation may be related policies, but the required syllabus responses are legislation/regulation, ownership and fines.

A policy that lowers price can also reduce investment or quality; the diagram alone cannot settle the evaluation.