CHAPTER 15MONOPOLY333reduce costs. Each firm in a competitive market tries to reduce its costs becauselower costs mean higher profits. But if a regulated monopolist knows that regula-tors will reduce prices whenever costs fall, the monopolist will not benefit fromlower costs. In practice, regulators deal with this problem by allowing monopoliststo keep some of the benefits from lower costs in the form of higher profit, a prac-tice that requires some departure from marginal-cost pricing.PUBLIC OWNERSHIPThe third policy used by the government to deal with monopoly is public owner-ship. That is, rather than regulating a natural monopoly that is run by a privatefirm, the government can run the monopoly itself. This solution is common inmany European countries, where the government owns and operates utilities suchas the telephone, water, and electric companies. In the United States, the govern-ment runs the Postal Service. The delivery of ordinary First Class mail is oftenthought to be a natural monopoly.
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