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

A utility company is a natural monopoly because duplicate pipe networks would be wasteful. Which government approach best controls its pricing while keeping a single supplier?

An independent regulator capping prices and setting service standards is best. It keeps the efficiency of a single network while preventing the monopoly from exploiting customers, unlike splitting the networks, banning profit or leaving prices unregulated.

  1. AAppoint an independent regulator to cap prices and set service standardsCorrect
  2. BBan the firm from earning any profit
  3. CSplit it into many small firms each with its own pipes
  4. DRemove all price oversight to encourage efficiency

Explanation

Where a single supplier is efficient, regulation such as price caps and service standards limits exploitation of market power. Splitting into duplicate networks defeats the cost advantage, banning profit removes investment incentive, and no oversight leaves monopoly pricing unchecked.

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