Explain how a natural monopoly may arise.

Discuss how governments restrict monopoly power.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definition of natural monopoly
• diagram to show falling long-run average costs at least up to the point where the LRAC curve intersects the market demand curve
• explanation that a natural monopoly is a firm that experiences such significant economies of scale (eg due to investment in fixed capital) that it is able to satisfy the demand for the entire market at a level of output where it still experiences falling average total cost and/or that natural monopoly arises due to a natural barrier to entry such as ownership of vital input for production
• examples of natural monopoly.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.

Answers may include:

• definition of monopoly power
• a monopoly diagram to show a monopoly which is not producing at the profit-maximizing level of output because the price of its product is regulated by the government
• explanation of why governments might choose to restrict monopoly power and how it might be done through government regulation of prices, legislation to prevent cartels and mergers, nationalization or the break-up of firms with monopoly power
• examples of industries that were monopolized where a government has sought to exercise control
• synthesis or evaluation (discuss).

Discussion may include: consideration of the relative merits of alternative means by which monopolies might be restricted. “Real-life” examples would be very suitable as a means to support the discussion.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

NB It should be noted that definitions, diagrams, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.

Stronger candidates were able to clearly distinguish between monopoly and natural monopoly but quite a few candidates just wrote everything they knew about monopoly, maybe hoping that there would be enough overlap between monopoly and natural monopoly to earn some marks.

The most prepared candidates were able to define precisely monopoly power, explain and discuss the government policies that restrict monopoly power, and support their answers with appropriate diagram and examples. However, there were quite a few candidates that strayed toward explaining and evaluating monopoly as a market structure.