Monopoly and public policy - dealing with Natural monopoly - regulation
12 important questions on Monopoly and public policy - dealing with Natural monopoly - regulation
Who a price ceiling on a monopolist create a shortage?
Why is the average total cost a downward sloping ATC
How is a natural monopoly's ATC sloped on the graph?
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Does the company have an incentive to produce a higher quantity? Why? What will happen to MR?
- Yes
- because if the price at which monopolist can sell its products is fixed by regulators the firms output no longer affects the market price
- MR is ignored and the monopolist produce where price meets demand
Where does the monopolist price ceiling have to be set? What is the lowest point it can be set at? What is that point called
average cost pricing
What are the two regulations for natural monopoly? What could the government do to help them? (iphone)
Marginal cost pricing = the monopoly is forced to charge where price equal marginal cost
this could require the government to provide the firms with a subsidy so that they can cover their fixed cost
What surplus could be increased by monopolists regulation? And what two sources are the gains coming from?
- The consumer surplus
- profits are eliminated and added instead to consumer surplus
- larger output and lower price leads to an overall welfare gain increases in total surplus.
What is the problem with using a price ceiling on a monopolist? What happens if they set it too low? What happens if they set it too high?
too low, it creates shortages
too high, ineffective
What is the risk of regulating a monopoly?
What do wee call the regulation the prohibits the firms from gaining more than economic profit? What can they do about price and quantity?
they can produce whatever price
they can produce whatever quantity
What are the advantage, and 2 disadvantages of the rate of return regulation?
disadvantage:
no incentives to decrease costs
unnecessary costs leading to DWL
What is the monopoly regulation in which the regulated monopoly is allowed to increase price by inflation-G
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