lec10slides - Problem: Regulator does not know costs and...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
1 4 Regulation of Natural Monopoly 1. Is there a natural monopoly? 2. What is optimal price for a natural monopoly? 3. How to regulate to attain optimal price? 5 Is there a natural monopoly? Compare min AC with demand.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 7 Natural Monopoly: $ Q AC D M Allow one firm and regulate its price. 9 Not a natural monopoly: $ Q D M AC Encourage many firms. Allow market forces to determine price.
Background image of page 2
3 10 Example: Telecommunications Local Origin Central Office Central Office Destination Long Distance Local 13 Example: Electricity Now: Generation is not natural monopoly. Transmission is natural monopoly. Distribution might or might not be. Generation Transmission Distribution
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 15 Direct Regulation of Natural Monopoly What is optimal? First-best: P = MC 17 At P=MC Natural monopolist loses money: $ Q AC D M MC First best P Loss
Background image of page 4
5 18 Direct Regulation of Natural Monopoly What is optimal? First-best: P = MC Second-best: P = AC 19 $ Q AC D M MC First best P Second best P Optimal Prices
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 21 How to attain optimal price?
Background image of page 6
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 8
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Problem: Regulator does not know costs and demand curve of firm. Firm has incentive to deceive regulator. 23 Forms of regulation: Rate-of-return regulation Price cap regulation 7 26 Rate-of-Return Regulation Firm is allowed to earn a fair return on investment.- Regulatory decides what return on capital is fair.- Prices are set at average cost using fair return on capital. 30 Regulator does not know true cost of capital. Suppose regulator sets fair return at true cost of capital: P = true AC Monopoly has no incentive minimize costs. above true cost of capital: P > true AC Monopoly has incentive to use too much capital. below true cost of capital: P < true AC Monopoly becomes insolvent. 8 33 Price Cap Regulation Commission sets a price cap. Firm can charge any price below that cap. Firm keeps whatever profits it earns....
View Full Document

Page1 / 8

lec10slides - Problem: Regulator does not know costs and...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online