A-Level Economics · Worked 25-marker · DRAFT
Evaluate the measures that could be used to control monopoly power
This is one of the most predictable 25-markers on the Edexcel micro paper — a version of it appears in nearly every past paper I have taught from. So rather than hand you a model answer to memorise, I want to do what my own Oxford tutors did for me: think about the question out loud, in front of you, so you can see how an economist decides what to write before writing a word. By the end you should be thinking “I could do that.” You can.
“Evaluate the measures that could be used to control monopoly power.”
Exam-style stem (paraphrased). Appears in very similar form on Edexcel A-Level Economics A, Paper 1 — the market-structures 25-marker (Question 8) recurs across recent series, e.g. June 2020 and October 2019.
Thinking about this question
First move — map the question to a topic
Before I think about a single policy, I decide what kind of question this is. The word that does the work is “measures” — that tells me this is a competition-policy question wearing a monopoly costume. Edexcel almost never asks you to control monopoly power in the abstract. Most of the time they ask the broad question — how would you control monopolies? — and they are expecting you to pivot to your favourite policies underneath. That is every single past paper I have seen so far for Edexcel. So the instant I read “measures to control monopoly power”, three tools should light up automatically:
- Price regulation — a maximum price (a price cap) that forces the firm down towards the efficient point.
- Promoting competition and contestability — deregulation, blocking mergers, subsidising new entrants, so the threat of entry disciplines the incumbent.
- The natural-monopoly case — a special case where you do the opposite of promoting competition: you regulate the price down and pay a subsidy. It is a lovely bit of range, but it is not needed to score full marks, so I develop it after the main answer as an optional extension.
(Profit regulation and quality standards sit in the same family — keep them in reserve as a third measure if you want a fuller answer.)
Second move — conceptualise it through the lens of the model
Every one of those measures is really doing the same thing on the same diagram, so I picture the monopoly diagram before I write. An unregulated monopolist profit-maximises where MR = MC, at a high price Pm and a low quantity Qm. Because average revenue sits above average cost there, it earns fat supernormal profit, protected by high barriers to entry. The problem the government is trying to fix is that Pm is above marginal cost — the firm is allocatively inefficient, price too high, quantity too low, with a deadweight-loss triangle of lost welfare. Once you see that, every “measure” becomes one sentence: this policy pulls the firm back towards the allocatively efficient point where AR = MC. That single lens organises the whole essay.
Why this matters — the “so what”
This is not an abstract exercise. Heathrow is a near-monopoly airport: every time a plane lands, the airline pays a landing fee, and left alone Heathrow would charge monopoly prices — so the regulator caps what it can charge. Thames Water and the rail network are natural monopolies supplying things households cannot do without, which is exactly why Ofwat regulates their prices. When six firms held roughly a 94% share of the retail energy market, the worry was ordinary families overpaying for an essential. The Competition and Markets Authority is a real body that blocks real mergers to stop this. The reason the government does any of it — and this is the deeper point that earns you marks — is that it is acting on behalf of consumers, who are the majority of people. The models in this answer are the same models the Treasury and the regulators genuinely reason with.
How to structure a 25-marker like this
The ruling
Policy 1 → evaluate it. Policy 2 → evaluate it. Then a supported judgement. That is the shape Edexcel rewards on a “measures/policies” 25-marker. Do not list six measures a sentence each — the mark scheme wants chains of reasoning. Pick your strongest measure, develop it fully, point–cause–consequence, then evaluate it; repeat once; then judge.
Concretely, my plan is: (1) price regulation, evaluated with regulatory capture and government failure; (2) promoting competition and contestability, evaluated with consumer inertia and the threat to dynamic efficiency; (3) a judgement on which measure, and when. Each analysis paragraph runs a 6–7 link chain and is anchored to a diagram. (The natural-monopoly case is a neat special case, but it is beyond what the question needs, so I take it as an optional extension after the judgement.)
Two developed evaluations are enough. One evaluation per measure, each run as a full chain, beats a long list of three or four rushed ones — and it is exactly what the 25-mark tariff rewards, because roughly half the marks are for evaluation and half for the knowledge, application and analysis in the chains. Depth over breadth: resist the urge to pile on more.
The model answer — with margin notes on why each move scores
Read the answer down the left. The gold notes on the right are what I would be saying over your shoulder in a lesson: why that sentence earns the mark, and the phrase I want you to steal.
A firm has monopoly power when it holds a dominant share of its market and is protected by high barriers to entry, which makes it a price maker rather than a price taker. Left unregulated, such a firm profit-maximises where MR = MC, producing a low quantity Qm and charging a high price Pm, and because AR > AC at that point it earns supernormal profit indefinitely. The government’s concern is that Pm sits well above marginal cost, so the outcome is allocatively inefficient: consumers face high prices and restricted choice, and society bears a deadweight loss. A range of measures can pull the firm back towards the socially optimal outcome, and I will develop price regulation and the promotion of competition as the two strongest, then reach a supported judgement.
Measure 1 — price regulation. The most direct measure is for a regulator to impose a maximum price. The regulator sets a legal price ceiling at, or close to, the allocatively efficient point where AR = MC. This is below the monopoly price Pm, which means the firm can no longer charge its profit-maximising price; as a result the price consumers pay falls and the quantity supplied rises from Qm towards the competitive quantity. Because price now moves towards marginal cost, resources are reallocated according to consumer demand, so consumer surplus expands and the deadweight-loss triangle shrinks. Crucially, as long as the capped price still sits above average cost, the firm continues to earn at least normal profit and therefore does not shut down — the regulator restores allocative efficiency without driving the firm out of the market. A real example is the price cap imposed on Heathrow, where the regulator limited the rise in landing charges to inflation minus 1.5%, so the airport was forced to raise prices by less than inflation each year.
However, price regulation can suffer from regulatory capture. The best regulators usually need deep industry experience, because they have to understand the firm’s costs and revenues — but that is precisely why they can be captured: the regulator ends up, to some extent, in cahoots with the industry it polices. Managers in the private sector influence regulation in their own interests, so the regulator may set a generous cap, or wave through price rises above the inflation-linked ceiling. As a result the efficiency gain is far smaller than it would be if the regulator were genuinely motivated to maximise social welfare — regulations end up being set for businesses, not for society. And since a regulator is expensive to run, if the cost of administering it exceeds the welfare it recovers, the policy becomes a net loss: a government failure. This evaluation applies to price, profit and quality regulation alike.
Measure 2 — promoting competition and contestability. Instead of regulating the price directly, the government can attack the market power itself. It can deregulate — removing legal barriers to entry — block mergers that would create dominance, and even subsidise new entrants to help them past the barriers. As more firms enter, the market structure shifts from monopoly towards competition, so price falls and output rises towards the competitive outcome. What is powerful is that you do not even need entry to actually happen: if the market becomes contestable, the mere threat of entry forces the incumbent to abandon profit maximisation and move to entry-limit pricing at AR = AC, cutting price from Pm to a lower limit price and raising quantity. Either way the firm is dragged closer to allocative efficiency where P = MC, so consumer surplus rises, choice widens, and firms must now compete on quality, branding and service rather than resting on market power. A clear example of the government preventing monopoly power from forming is the CMA’s decision to block the £7.3bn Sainsbury’s–Asda merger in 2019, on the grounds that the combined firm would have raised prices and reduced choice.
However, promoting competition may not deliver. Consumer inertia and brand loyalty can defeat the policy entirely: consumers stick with the incumbent they recognise, so new entrants see that customers are slow to switch and simply do not enter, leaving prices high despite deregulation — recall that even after energy was liberalised, a handful of firms kept the overwhelming majority of the market. There is also a deeper cost: heavy restrictions on a monopoly can restrict dynamic efficiency. A monopolist’s supernormal profit is the fund it reinvests in R&D, so if regulation or forced competition strips that profit away, the firm has less to spend on innovation, and consumers lose the new products and falling long-run costs that reinvestment would have delivered. And contestability is fragile: entry-limit pricing itself makes the market less attractive over time, the pool of potential entrants drifts away, and the incumbent eventually reverts to profit maximisation at MR = MC — the very outcome the policy was meant to prevent.
Judgement. The best measure depends on the market, but between my two measures the stronger for an ordinary monopoly is price regulation: it sticks the price at the allocatively efficient point, recovers the deadweight loss and maximises the gains from trade, and the firm will not shut down as long as the capped price stays above average cost. Promoting competition is powerful but slower and easily defeated by consumer inertia, and heavy-handed restriction risks sacrificing the dynamic efficiency that supernormal profit funds. The decisive risk against all of it is regulatory capture, which is why any measure is only as good as the regulator enforcing it. Overall, a well-designed price cap — backed by merger control to stop dominance forming in the first place — is the most reliable way to control monopoly power in the consumer’s interest. (Where the firm is a natural monopoly the calculus flips, and the price cap must be paired with a subsidy — a special case I develop in the optional extension below.)
Additional comments — beyond what’s needed
The answer above is already a complete, top-band response: two measures, two developed evaluations, a judgement. What follows is interesting, not required. The natural-monopoly case is a lovely piece of range that shows you understand when the usual logic reverses — but you do not need it to reach full marks, so treat it as an optional extension rather than part of the core essay.
The special case — natural monopoly
The measure has to fit the market, and for a natural monopoly the right answer is almost the reverse of promoting competition. Where fixed costs are enormous and economies of scale are vast — the water pipe network, the electricity grid, 32,000 km of rail track and 2,500 stations you must build even with no customers — it is efficient for a single firm to supply the whole market, because splitting it would mean wasteful duplication of those fixed costs and rising average costs. So you do not introduce competition; you regulate. Left private, the natural monopolist charges a high price and leaves consumers with a tiny consumer surplus. The government forces it to the allocatively efficient point by setting a maximum price at AR = MC, which pulls price down and pushes quantity up so consumer surplus becomes large. But at that regulated price the firm now makes a loss, because average cost lies above average revenue — so the government pairs the price cap with a subsidy to cover the gap and keep the firm operating. This is exactly how essential natural monopolies like Thames Water and the train companies are handled: price-regulate them, then subsidise them so they do not shut down.
From the lesson room: structure it cleanly — the analysis is that natural monopoly is awful (high price, lost surplus); the evaluation is that the government can regulate, subsidise and fix it. The one evaluation of the fix is the cost of the subsidy — do not then add “but subsidies are bad too.” That is evaluating the evaluation.
How to think like an economist
Notice what actually happened in that answer. You did not memorise a list of policies — you took one diagram and asked, of every measure, “how does this move the firm from Pm, Qm towards P = MC?” That is the economist’s habit: a model is like the London Tube map — a deliberate simplification that is wrong in a hundred ways and useful in the one way that matters, because it lets you reason your way from A to B. The monopoly diagram is the map the CMA and the Treasury genuinely reason with.
The second, deeper move is that you never lost sight of why the government is intervening at all: it is acting on behalf of consumers, who are the majority. Showing you understand the policymaker’s objective — not just the mechanics — is what separates a technically correct answer from one that reads like it was written by an economist. That is the layer the exam is really testing, and it is the layer that will still matter long after the exam.
Now have a go
Close this page and write it yourself. Draw the monopoly diagram from memory, pick your two favourite measures, and run each one as a chain: measure → what happens to price and quantity → what happens to efficiency and consumer surplus → the evaluation that pushes back. Then judge.
Your answer does not have to match mine to be excellent. If you route the whole thing through profit regulation and contestability instead of price caps, or you lead with blocking mergers, that can score just as highly — what the examiner rewards is the thinking: explicit links, a diagram, a real example, and a judgement you actually commit to. Deviate from my model all you like. Just make every step visible.