Lecture12_regulation - Lecture 12 Regulation Public...

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Lecture 12: Regulation & Public Enterprise Commerce 394: Government and Business Keith Head Sauder School of Business November 2, 2015
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Part I: Regulation Learning Objectives Based on readings in Brander (12.1–12.6) and active learning from this lecture students should be able to Recognize the technological conditions that give rise to natural monopoly. Understand the alternative government policy approaches to natural monopoly. Explain using a graph the reasoning for average cost pricing instead of marginal cost pricing. Diagnose the problem of regulatory capture. know how to determine valid economic reasons for regulatory policies in different sectors (especially finance).
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Natural Monopoly A natural monopoly is said to exist when any feasible level of demand can be met at lower cost by a single firm than two or more firms. Natural monopoly occurs when average costs are declining throughout the area covered by the demand curve. Examples: Utilities (gas, water, electricity), mail, rail transport, and local telephone service.
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Characteristics of natural monopolies 1. Capital Intensive . Public utilities have capital-to-output ratios 3–4 times higher than average for manufacturing industries. I Having high capital intensity usually leads to high fixed costs relative to total costs and implies declining total average costs over a considerable range of output. I Capital requirements that are proportional to output do not lead to natural monopoly. 2. Physical network . A large share of the capital mentioned in item 1 is a physical network linking the producer/distributor to the consumer. Examples: I wires (telecommunications), I pipes, transmission cables (energy), I roadbeds (transport) Duplication of the network by competing firms would be
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Energy “monopolies” of BC BC Hydro: electric power, BC government owned FortisBC: natural gas, private investor owned BC Utilities Commission: regulates prices set by both companies Note: the seven biggest non-financial public enterprises in Canada are all in power generation (see table 12.2). We will consider the private vs public ownership issue later.
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BC Hydro A Crown corporation owned by the Province of British Columbia. One of North Americas leading providers of clean, renewable energy, serving approximately 95 per cent of the provinces population. Electricity is delivered to customers through a network of over 18,500 kilometres of transmission lines and 57,000 kilometres of distribution lines. BC Hydro video illustrating fixed costs of the generation and transmission equipment
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i > Clicker Quiz: Fixed costs: real world Which of the following is NOT an example of a fixed cost that contributes to decreasing average costs per customer for energy production?
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  • Winter '08
  • florencia
  • Economics, average costs

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