Price caps are suggested as ways to reduce the social welfare loss from both monopolyand natural...

Price caps are suggested as ways to reduce the social welfare loss from both monopolyand natural monopoly. Illustrating with a graph for each, explain how to set the “best” price cap for each type of monopoly, how this improves social welfare, and how they differ.

Expert Solution

Below are two cases 1) Natural monopoly and 2) General monopoly with U-shaped ATC. The price cap is a regulation imposed on the price which takes the form of P = AC (average cost pricing) and P = MC (marginal cost pricing). Social welfare is increased under both cases but the rule P = MC is not a long run solution because it discourages monopoly to sustain in the long run

Rahul Sunny answered 1 year ago

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