extraction of fossil fuels and the harvesting of forests within their
provincial boundaries, and charge royalties (a share of revenues) to the
firms who develop these natural resources. Local governments regulate
the zoning of land and thus have an important influence on where firms
can and cannot operate their businesses; they also regulate the operation
of restaurants and taxicabs, and issue licences for retail businesses.
Most of the examples just described are regulations used by governments
to address the allocative inefficiency caused by various kinds of market
failures—and we will discuss many of them in Chapters 16 through
For now, we will focus our discussion on the specific policies and
regulations designed to address the market power possessed by
monopoly and oligopoly firms.
Competition policy is used to promote allocative efficiency by increasing
competition in the marketplace. Where competitive behaviour is not
possible (as in the case of natural monopolies, such as natural gas or
electricity distribution companies), public ownership or economic
regulation of privately owned firms can be used as a substitute for
competition. Consumers can then be protected from the high prices and
restricted output that would likely result from the unregulated use of
market power.
In the remainder of this chapter, we look at a variety of ways in which
policymakers have chosen to intervene in the workings of the market
economy using economic regulation and competition policy.