12. 2 Economic Regulation to Promote Efficiency
Efficiency LO 3
Two broad types of policies are designed to promote allocative
efficiency in imperfectly competitive markets. These can be divided
into economic regulations and competition policy. Economic regulation
is used both in the case of a natural monopoly and in the case of an
oligopolistic industry. Competition policy applies more to the latter.
For a natural monopoly (with a declining LRAC curve), marginal-cost
pricing is alloctively efficient but will lead to the firm making
economic losses.
Average-cost pricing allows the natural monopoly to break even but
leads to allocative inefficiency (because price is not equal to marginal
cost).
The deregulation of oligopolistic industries has been based on the
observations that (1) oligopolistic industries are major engines of
growth, and (2) direct control of such industries has produced
disappointing results in the past.
In recent years, rising corporate concentration is generating concerns
that policy may be necessary to enhance the degree of competition in
oligopolistic industries.