Question

Suppose that a computer software company controls the operating system market. Although the government knows that the price is higher than it would be in the presence of competition, it believes that such profits are crucial to incentivizing innovation in the high-tech industry, a policy goal of the government. Which of the following policy options might most effectively enable the government to achieve its objectives in this situation?

Answer 1

Answer:

The question is missing the options, however, I will provide them below, and choose the correct answer.

A) Do nothing at all.

B) Use the law to increase competition.

C) Turn the company into a public enterprise.

D) Regulate the pricing behavior.

The correct answer is A: Do nothing at all

Explanation:

The government has an incentive to allow prices to be high, the incentive is that the high profits the monopolist company is receiving are being reinvested in research and technology.

Any other action would potentially result in lower prices.

• Increasing competition according to economic theory would lower prices.
• Turning the company into a public enterprise would not be a bad idea, but there is always the possiblity that the government will not be able to maintain the quality of the product, or that it will not be politicaly feasible for the government to charge such high prices.
• Regulating the pricing behavior by definition would result in lower prices, and could also distort the company's behaviour by reducing profits so much that they become losses.