Breaking up a monopoly that isnt natural is a good idea Ex Microsoft buying Apple Why The gains to the consumer outweigh the loss to the producer Natural Monopolies A monopoly in which large producers have lower average total costs than small producers ID: 728563
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Slide1
RegulationSlide2
Natural Monopolies
Breaking up a monopoly that isn’t natural is a good idea
Ex. Microsoft buying Apple
Why?
The gains to the consumer outweigh the loss to the producerSlide3
Natural Monopolies
A monopoly in which large producers have lower average total costs than small producers
Should these be broken up?
If they do, it would raise total costs
Ex. Small town government tries to prevent a single company from dominating local gas supply – if it does, the cost of providing gas to its residents would raiseSlide4
Increasing Returns to Scale Create Natural Monopoly
D
A
T
C
Quantity
Price, cost
Relevant output range
Natural monopoly. Average total cost is falling over the relevant output range
Natural monopolist’s break-even priceSlide5
Natural Monopolies
With all monopolies, even natural monopolies, a profit-maximizing monopolist acts in a way that causes inefficiency
Consumers are charged a price that is higher than marginal cost and by doing so, prevents potential beneficial transactions
How can better economic outcomes be established?
Through public policy and public regulationSlide6
Public Ownership
The good is supplied by the government or by a firm owned by the government
Ex. Amtrak, U.S. Postal Service, mass transit, water supply systems and garbage collection at local levels
Advantage of this: a publicly owned natural monopoly can set prices based on the criterion of efficiency rather than profit maximization
Disadvantage: less eager than private companies to keep costs downSlide7
Price Regulation
Also known as industrial regulation
Limits the price that a monopolist is charged
Commission
(Year
Established)
Jurisdiction
Federal Energy
Regulatory Commission (1930)
Electricity,
gas, gas pipelines, oil pipelines, water-power sites
Federal Communications Commission (1934)
Telephones,
television, cable television, radio, telegraph, CB radios, ham operators
State public utility commissions (50 states)
Electricity, gas, telephonesSlide8
Price Regulation
Public interest theory of regulation states that industrial regulation is necessary to keep a natural monopoly from charging monopoly prices and thus harming consumers and society
Regulators seek to establish rates that will cover production costs and create a “fair” return to the priceSlide9
Natural Monopolies
Rate Regulation
Socially Optimum Price
P = MC
Fair-Return Price
P = ATC
Dilemma of Regulation
REGULATED MONOPOLYSlide10
REGULATED MONOPOLY
Q
D
MR
MC
ATC
P
Price and Costs
Monopoly Price
MR = MC
Q
m
P
mSlide11
REGULATED MONOPOLY
Q
D
MR
MC
ATC
P
Price and Costs
Fair-Return Price
Normal Profit Only
Q
f
P
fSlide12
REGULATED MONOPOLY
Q
D
MR
MC
ATC
P
Price and Costs
Socially-Optimum
Price
P = MC
Q
r
P
rSlide13
REGULATED MONOPOLY
Q
D
MR
MC
ATC
P
Price and Costs
MR = MC
Fair-Return Price
Socially-Optimum
Price
Q
m
Q
f
Q
r
Dilemma of Regulation
Which Price?
P
m
P
f
P
rSlide14
Costs and Inefficiency
Unregulated firms have an incentive to reduce its costs at each level of output because it will increase its process
Regulatory commission confined the regulated firm to a normal profit or “fair return” on the value of its assets
Regulated firm has little or no incentive to reduce its operating costsSlide15
Perpetuating Monopoly
Problem with industrial regulation is that it perpetuates monopoly long after the conditions of natural monopoly have ended
What creates this?
Technological change
Trucks verse railroads, cell phones verse land lines
Commissions set up to regulate
Protect regulated monopolies from new competition by blocking entry or extending regulationSlide16
Legal Cartel Theory
Some industries seek regulation or want to maintain regulation in order to form/maintain a legal cartel
Why?
It can guarantee a profit
How?
Blocking entry
Illegal?
Private cartels are, govern-sponsored cartel under regulation are notSlide17
Deregulation & Social Regulation
Deregulation has produced large net benefits for consumers and society
Specifically, airlines, railroads and trucking
Also in long-distance telecommunications, cable television
Deregulation of electricity has been a success with a few setbacksSlide18
Social Regulation
Is not concerns with natural monopolies but with good and services produced, the impact of production on society and the physical qualities of the goods themselves
Commission
(Year
Established)
Jurisdiction
Food and Drug Administration 1906
Safety
and effectiveness of food, drugs, and cosmetics
Equal Employment Opportunity Commission 1964
Hiring, promotion, and discharge
of workers
Occupational
Safety and Health Administration 1971
Industrial health and safety
Environmental Protection Agency 1972
Air, water, and noise pollution
Consumer Product
Safety Commission
Safety
of consumer productsSlide19
Social Regulation vs. Industrial Regulation
Applies to more firms, applied “across the board” to all industries and affects more producers
Intrudes into the day-to-day production process
Ex. EPA
Social regulation expanded when industrial regulation wanedSlide20
Optimal Level of Social Regulation
What is the optimal level?
Remember, it is recommended for any industry/firm to have it MB exceed its MC
If the MB of social regulation exceeds MC, too little social regulation
If MC exceed MD, too much!Slide21
So, is there a free lunch?
Social regulation can produce higher prices, stile innovation, and reduce competition
But, less government intervention is not always better than more governmentSlide22Slide23
Regulation NotesSlide24
Natural Monopolies
Breaking up a monopoly that isn’t natural is a good idea
Why?
The gains to the ____________outweigh the loss to the
____________Slide25
Natural Monopolies
A monopoly in which large producers have lower average total costs than small producers
Should these be broken up?
If they do, it would raise
____________
Ex. Slide26
Increasing Returns to Scale Create Natural Monopoly
D
A
T
C
Quantity
Price, cost
Relevant output range
Natural monopoly. Average total cost is falling over the relevant output range
Natural monopolist’s break-even priceSlide27
Natural Monopolies
With all monopolies, even natural monopolies, a profit-maximizing monopolist acts in a way that causes
____________
Consumers are charged a price that is higher than marginal cost and by doing so, prevents potential beneficial transactions
How can better economic outcomes be established?Slide28
Public Ownership
The good is supplied by the government or by a firm owned by the government
Ex.
Advantage of this: a publicly owned natural monopoly can set
____________
based on the criterion of
____________
rather than profit
____________
Disadvantage:Slide29
Price Regulation
Also known as
____________
regulation
Limits the price that a monopolist is charged
Commission
(Year
Established)
Jurisdiction
Federal Energy
Regulatory Commission (1930)
Electricity,
gas, gas pipelines, oil pipelines, water-power sites
Federal Communications Commission (1934)
Telephones,
television, cable television, radio, telegraph, CB radios, ham operators
State public utility commissions (50 states)
Electricity, gas, telephonesSlide30
Price Regulation
Public interest theory of regulation states that
____________ ____________ is
necessary to keep a
____________ ____________ from
charging monopoly prices and thus harming consumers and society
Regulators seek to establish rates that will cover production costs and create a
“____________”
return to the priceSlide31
Natural Monopolies:
Rate
Regulation
Socially Optimum Price
____________
Fair-Return
Price
____________
Dilemma
of Regulation
REGULATED MONOPOLYSlide32
REGULATED MONOPOLY
Q
D
MR
MC
ATC
P
Price and Costs
Monopoly Price
____________
Q
m
P
mSlide33
REGULATED MONOPOLY
Q
D
MR
MC
ATC
P
Price and Costs
Fair-Return Price
Normal Profit Only
Q
f
P
fSlide34
REGULATED MONOPOLY
Q
D
MR
MC
ATC
P
Price and Costs
Socially-Optimum
Price
____________
Q
r
P
rSlide35
REGULATED MONOPOLY
Q
D
MR
MC
ATC
P
Price and Costs
MR = MC
Fair-Return Price
Socially-Optimum
Price
Q
m
Q
f
Q
r
Dilemma of Regulation
Which Price?
P
m
P
f
P
rSlide36
Costs and Inefficiency
Unregulated firms have an ____________ to reduce its costs at each level of output because it will increase its process
Regulatory commission confine the regulated firm to a normal profit or
“____________”
on the value of its assets
Regulated firm has little or no
____________
to
____________
its operating costsSlide37
Perpetuating Monopoly
Problem with industrial regulation is that it perpetuates monopoly long after the conditions of natural monopoly have ended
What creates this?
____________ ____________
Ex.
____________
set up to
____________
Protect regulated monopolies from new competition by blocking entry or extending regulationSlide38
Legal Cartel Theory
Some industries seek regulation or want to maintain regulation in order to form/maintain a legal cartel
Why?
________________________
How
?
________________________
Illegal
?
Private cartels are, govern-sponsored cartel under regulation are notSlide39
Deregulation & Social Regulation
Deregulation has produced large net benefits for
____________
and
____________
Specifically,
________________________
Also in long-distance telecommunications, cable television
Deregulation of electricity has been a success with a few setbacksSlide40
Social Regulation
Is not concerns with natural monopolies but with
____________
and
____________
produced, the impact of production on
____________
and the physical qualities of the
____________ t
hemselvesSlide41
Social Regulation
Commission
(Year
Established)
Jurisdiction
Food and Drug Administration 1906
Safety
and effectiveness of food, drugs, and cosmetics
Equal Employment Opportunity Commission 1964
Hiring, promotion, and discharge
of workers
Occupational
Safety and Health Administration 1971
Industrial health and safety
Environmental Protection Agency 1972
Air, water, and noise pollution
Consumer Product
Safety Commission
Safety of consumer productsSlide42
Social Regulation vs. Industrial Regulation
Applies to more firms, applied “across the board” to all industries and affects more producers
Intrudes into the day-to-day production process
Ex. ______________________
Social regulation expanded when industrial regulation wanedSlide43
Optimal Level of Social Regulation
What is the optimal level?
Remember, it is recommended for any industry/firm to have it ______ exceed its
______
If the
______
of social regulation exceeds
______,
too little social regulation
If
______
exceed
______,
too much!Slide44
So, is there a free lunch?
Social regulation can produce
______ prices
,
little ____________,
and reduce
____________
But, less government intervention is not always better than more government