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Unformatted text preview: Monopoly Regulation Natural Monopoly Industry in which economies of scale are so great that a single firm can produce the product at a lower ATC than would be possible if more than one firm produced the product. Regulation Usually comes in the form of rate (price) regulation. Recent trend has been to deregulate the parts of the industries where competition seems possible. Examples of deregulation include: long distance, cable television, longdistance electricity transmission, natural gas @ the wellhead. Prices are still regulated on most local natural gas distributors, regional telephone companies, & local electricity suppliers. Graphically speaking Massive economies of scale for the natural monopolist create a situation where the demand curve intersects the longrun ATC while that curve is still decreasing. Because of this scenario, it would be inefficient to have several firms operating in this industry b/c each firm would produce a much lower output, leaving them much further to the left on the LR ATC curve. MR=MC? Ordinarily yes. (Applies to the unregulated monopolist) Socially optimal price P=MC. Point of allocative efficiency. At this point, (r for regulated), it causes the monopolist's demand curve to become horizontal from zero to point r. This also makes MR=Pr . The regulatory commission can simulate the allocative forces of perfect competition by imposing the regulating price and letting the firm choose its profitmaximizing or lossminimizing output. Fairreturn price P=ATC Socially Optimal price may result in a loss to the firm b/c ATC is not covered. This could result in a public subsidy to keep the firm from going bankrupt in the longrun. Could also result in price discrimination that could allow costs to be covered. If we are discussing utility (gas, electric, etc.) ownership, the Supreme Court states that the regulatory agencies must permit a "fair return" to utility owners. This fair return price lies on the ATC curve. It ensures a normal profit but no economic profits. Dilemma of Regulation
When price is set to achieve the most efficient allocation of resources (P=MC), the regulated monopoly suffers a loss. When P=ATC, there is still an underallocation of resources. This is still better from society's perspective than the unregulated monopoly. ...
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