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ACCA Applied Knowledge · Business and Technology · Political and legal factors affecting business

A single water company is the only supplier in a region because building duplicate pipe networks would be wasteful. Which approach to controlling it is most consistent with competition policy for a natural monopoly?

A natural monopoly is usually controlled by an independent regulator setting price limits and service standards. One supplier is efficient because duplicating infrastructure is wasteful, so the state accepts the monopoly but prevents it exploiting customers. Break-up or total deregulation would be inefficient or allow abuse.

  1. ARegulating prices and service standards through an independent regulatorCorrect
  2. BBreaking it into many small firms each with its own pipe network
  3. CBanning the firm from earning any profit
  4. DRemoving all regulation to let the market decide

Explanation

For a natural monopoly, one provider is most efficient because of very high fixed infrastructure costs. Governments therefore usually accept the monopoly but regulate price and quality, often via price caps. Splitting into duplicate networks would waste resources, and removing regulation would allow abuse of monopoly power.

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