073007 - 3 After some period of time the max price the firm...

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Sheet1 Page 1 --------- Because in a natural monopoly, a firm will produce where its MR = MC, but this can cause a huge deadweight loss, so societ y A society can regulate a firm to use the MC quantity, but that causes a low price and economic loss. A society can also use th e Rate of Return Regulation was used: 1) Normal profit: $20 2) Other costs: $180 3) Total costs: $200 4) Quantity: 10 units 5) P = ATC = TC/Q = $200/10 = $20 This is behaving efficiently Now costs are inflated: 1) Normal profit: $20 2) Other costs: $280 3) Total cost: $300 4) Quantity (oh shit decrease): 9 5) P = ATC = $33.33 This has no impact on shareholders, makes the CEO better off ("capture the regulator" and inflating the costs), and fucks ove r Different regulatory schemes: Incentive Schemes Price Cap 1) Sets max price a company can charge 2) The firm can keep part of any economic profit it earns. This is the incentive.
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Unformatted text preview: 3) After some period of time, the max price the firm can charge is renegotiated. Anti-Trust Laws Sherman Anti-Trust Act (1890): First federal anti-trust law. Section 1: Outlaws "every combination in the form of a trust or otherwise, or conspirazy in restrating of trade." This looks like c o Section 2: Make "every person who shall monopolize, or attempt to monopolize, guilty of a felony." This looks at market struct u Price fixing is per se illegal (from this law). This means no matter what, no matter the reason. Standard oil case--Rule of Reason: Only unreasonable attempts to monopolize are illegal. Clayton Act (1914): Prohibited if they "substantially lessed competition or create monopoly" Things prohibited: Price discrimination, serving on the boards of directors of competing companies, exclusive deals (when a re...
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