19 . Regulating Monopoly
In a competitive market, equilibrium price and output show the levels of
production and consumption that result in optimum economic efficiency. In
a monopolistic market, however, since output is lower and price is higher
than the competitive equilibrium there is a loss to society. The government
therefore often takes measures to regulate or control monopolies.
One measure is to make the market more competitive. A few years ago,
for example, Honda motorbike producers could be considered monopoly in
the Vietnamese market and the unit price was close to US$2,500. However,
since the government allowed imported and domestically assembled
motorbikes of different brands to be sold, the resulting competitive pressure
forced Honda motorbike producers to lower their prices by 50%.
With regard to monopolies that have exclusive access to strategic
resources such as energy and gas, the government can use taxes to reduce
their excess profits. The corporate income tax, for example, levied on oil
companies in Vietnam is 50% while the typical rate applied to other
industries is 32%.
Price control is another measure that the government uses to regulate
natural monopolies such as railroad, power, and water supplies. In this case,
a maximum price is allowed based on a fair rate of return that the
monopolist will earn from its capital investment and the risk that it will
face.
Yet, eliminating monopoly can at times be adverse to social welfare if
governments do not have additional measures to prevent negative
externalities. The motorbike problem in Vietnam traffic today is an
example. Therefore, the need and method of regulating monopolies is a
topic still under debate in economics.
