Question

1) Why are railroads natural monopolies? What limits their pricing power?

2) Should we try to eliminate all pollution? What economic considerations might favor permitting some pollution?

3) Would the US economy be better off without government intervention in agriculture? Who would benefit and who would lose?

Answer 1

1) Railroads and other public utilities which require unique raw materials and technology and specific factors are natural monopolies which take advantage of economies of scale and natural barriers to entry. Since there are economies of scale amd economic profits accruing to the natural monopolist it requires government regulation which limits the pricing in such markets.

2) pollution is an externality which is negative. In economics, when there is exchange of goods between buyer and seller which has an impact on a third party is causing externality. There is an optimal level of pollution which is not zero where marginal benefits equals marginal costs associated with pollution.

3) Government intervention in the agriculture sector would aid in combating uncertainty associated with the commodity prices in this sector which depends on weather conditions but for a developed economy like US, it doesnot become better off or worse off as the farm price doesnot influence the US market but economy determines farm prices.