structure partially aided by the government. Write a short essay on the airline industry’s post deregulation growth, challenges and the current status. Prior to 1978, The Civil Aeronautics Board (CAB) previously controlled entry, exit and the prices that airline sets. In addition to the mentioned, CAB also controlled the inter-carrier agreements, mergers and consumer issues. The airlines back then faced strict constraints when they have to make investment and operation decisions. Post deregulation shows a healthy growth of number of entrants into the market which leads to low, competitive prices being set by the airlines. Since the deregulation, there were almost 18 times more Low Cost Carriers (LCC) that were being set up. However, there were too many new LCC entering into the market which resulted in the market becoming almost monopolistic competitive, especially when it was first deregulated. The challenges that the airline industry faced after the deregulation in the sudden influx of airlines which challenged the players in the market. Especially, low-cost carriers (LCCs). Even until today, the effects of the deregulation is still lingering around. Despite the large number of LCC being set up. Only some survived (due to the large economies of scale) and managed to still be in operation. Source used for this short essay: Do you think all natural monopolies should be deregulated allowing competition to set in? No I do not think natural monopolies should be deregulated. Firstly, even if natural monopolies were deregulated, there will still be no new entrants into the market. This is because of the economies of scale that is being experienced so it make sense to have only one firm. Continuing from the above point, if it was deregulated and no entrants into the market, the firm now has monopoly power over the market. They will choose to produce at an output level that is much lower than the efficient scale and price their products much higher. By restricting the amount they produce and raising its price, monopolist is guaranteed to earn maximum profits. However, this is at the expense of the society welfare as people would have to pay more. Next, natural monopoly faces almost perfectly inelastic demand due to the nature of their products being a necessity. Let’s take for example, the utilities (water) industry. The government is definitely concerned about how much of the country’s water is being allocated to its people (allocative efficiency). If this natural monopoly is not being regulated, not everyone will have access to water (which is a necessity) as exorbitant prices will be charged by the firm. In this case, government can set a price celling which is equal to the firm’s
PROBLEM SET 2 20 average total cost. This resulting in the firm breaking-even and not having to go out of business. There will be arguments that regulating natural monopoly restricts the competition in the market and also deters consumers from having more choices. However, back to my first point, there will be almost no entrant into the market due to economies of scale. All in all, natural monopolies should not be deregulated.
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