Chapter 15 Outline - Chapter15Outline 21:12 marketpower...

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Chapter 15 Outline 21:12 Economic Regulation and Antitrust Policy 15-1 Types of Government Regulation The ability of a firm to raise the price without losing all its sales to rivals is called  market power. Any firm facing a downward-sloping demand curve has some control over the price  and thus some market power. By failing to expand output to the point where marginal benefit equals marginal cost,  firms with market power produce less of the good and charge a higher price than  would be socially optimal. Three kinds of government policies are designed to alter or control firm behavior Social regulation Economic regulation Antitrust policy Social regulation tries to improve health and safety, such as control over unsafe  working conditions and dangerous products. Economic regulation aims to control the price, output, the entry of new firms, and the  quality of service in industries in which monopoly appears inevitable or even  desirable. Government oversight of a natural monopoly Antitrust policy outlaws attempts to monopolize, or cartelize, markets in which  competition is desirable. 15-2 Regulation a Natural Monopoly A. Unregulated Profit Maximization o A natural monopoly usually faces huge initial capital costs o Once capital is in place, average cost falls as output increases, so  the average cost curve slopes downward over a broad range of  output.
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o o The marginal value of additional output exceeds its marginal cost,  so social welfare would increase if output expanded o Government can increase social welfare by forcing the monopolist  to lower the price and expand output Government can either operate the monopoly itself Or regulate a privately owned monopoly
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