Helpful study hint making the connection should the

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± Helpful Study Hint Making the Connection “Should the Government Prevent Banks from Becoming Too Big?” discusses whether the government should allow banks to merge or not. If there are large economies of scale that can be achieved by merging, then these mergers could increase economic efficiency. Regulations have been established by the federal government that will allow banks to merge only if merging means that no individual bank will control more than 10 percent of the deposits in the economy. The actual regulation of natural monopolies is more complicated than the guidelines “set price equal to marginal cost” or “set price equal to average total cost” suggest. Regulatory commissions often recruit their members from the companies they regulate. Although these individuals have valuable knowledge regarding the regulated firm, they may be biased toward the firm’s views, even at the expense of interests of the consumers, who they are supposed to represent. Other regulators may be biased against the firms they regulate. It is difficult to select commission members who are both knowledgeable and unbiased. Another problem is that allowing a firm to earn a normal profit may give it less incentive to reduce its costs than if it were unregulated. The firm would not earn higher profits from any cost-cutting actions and the commission might be willing to allow a price increase if higher average total costs could be documented. Economics in YOUR Life! answers the question “Why Can’t I Watch the NFL Network?” Because cable companies have market power, they may be able to increase their profits by not offering the NFL Network, just as monopolies typically can increase profits by producing a smaller quantity than would be produced in a competitive market.
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CHAPTER 14 | Monopoly and Antitrust Policy 397 Extra Solved Problem 14-5 Chapter 14 includes two Solved Problems. Here is an extra Solved Problem to help you build your skills solving economic problems. Supports Learning Objective 5: Discuss government policies toward monopoly. Does Microsoft Stifle Innovation? In 2004, the European Commission found that Microsoft was using its market power to impede innovation and competition in the information technology market. Microsoft was fined Euros 497 million, or $675 million U.S. dollars. Microsoft appealed this ruling to the European Union’s Court of First Instance and lost the appeal, so the original ruling that Microsoft was impeding competition was upheld. Source: “Always Look On the Bright Side of Innovation” by Alan Burnside and Lars Liebeler, Financial Times , September 5, 2007. Explain why the European Commission and the European Union’s Court of First Instance would be concerned with Microsoft’s actions that impeded competition.
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