Natural monopoly firms are often regulated so that they can only charge prices set by the...

Natural monopoly firms are often regulated so that they can only charge prices set by
the authorities. Under one approach, prices are based on the monopolist’s costs so that for any given quantity of sales, the monopolist can only set prices equal to its average costs.

1. Why might regulators believe that forcing the monopoly to charge a price equal to average cost is a good outcome? Does this price regulation maximise social welfare? What problems do you see with this form of price regulation?

2. Suppose the monopolist can undertake innovation that will lower its average cost. If the monopolist faces average-cost price regulation, does it face strong or weak incentives to innovate? Explain your answer.

3. An alternative to average-cost price regulation is to set a ‘price cap’ for the natural monopoly firm. With a price cap, the regulator does not adjust the regulated price as soon as monopolist’s costs change but keeps the same regulated prices for a number of years. It is argued that price- cap regulation encourages innovation. Do you agree with this and why?

Expert Solution

Ans 1.: Average cost is the one tool by which monopoly firm can be regulated otherwise monopolist can charge anything they wish to charge they intentionally reduce the supply in the market to raise the demand that will lead to rise in price of goods.Therefore regulators asked them to charge where the average total cost cuts the demand curve .Average cost is the cost of production for one unit it is get by dividing total cost by the total output.therefore it is more optimum way of price charging from its customers .regulators allows monopolies to charge equal to thier Average cost for product oe services they offer some time they allow to charge little more.

Average cost pricing does not allows monopoly firm to charge more price therefore its protect customer from charging extra from them.therefore it act as a social welfare for customers.

Disadvantages of average cost pricing:

Although average cost pricing is the best technique to regulate the monopolist yet consist the disadvantages:

*It does not consider the changes in the cost at different output level ;cost may differentiate at different level of production which does not considered in average cost pricing technique.

It does not allow monopolist to charge more margin ;if sale or demand decrease in future monopolist will face the loss.

Rahul Sunny answered 2 years ago

1.What is a natural monopoly? Explain with a graph how a regulated natural monopoly sets its...

1.What is a natural monopoly? Explain with a graph how a regulated natural monopoly sets its price. 2.Draw a graph that shows a monopoly firm making economic profit in the short run. Be sure your diagram includes the monopolist’s demand, marginal revenue, average total cost, and marginal cost curves. Be sure to indicate the profit maximizing output and price. Are these profits sustainable in the long run?

Firms often employ price discrimination. They try to segment their markets and charge different prices to...

Firms often employ price discrimination. They try to segment their markets and charge different prices to customers with different demand elasticities. The theory is simple. Identify those customers with highly-elastic demands (they're the ones who are very sensitive to price and will be driven into the arms of your competitors by high prices), and cut prices. Next, identify customers with less-elastic demands (they're the ones who are insensitive to price and are likely to buy anyway), and drive the price...

When a natural monopoly is regulated using an average cost pricing rule, what can you say...

When a natural monopoly is regulated using an average cost pricing rule, what can you say about the firm's profit and the market's efficiency?

What is the fair -return price for a regulated natural monopoly and why is this more...

What is the fair -return price for a regulated natural monopoly and why is this more usual that the socially optimal price?

In both a command economy and in a monopoly, prices are not set according to the...

In both a command economy and in a monopoly, prices are not set according to the rules of supply and demand. True False Technology is generally considered inflationary because while no wealth is created or destroyed, the cost of a good or service increases while the quality of the good or service remains the same. True False With an economy based on the Market (a Market economy), prices are set based on the effects of supply and demand. True False...

A monopoly can set any price it wants. So why does it still produce at a...

A monopoly can set any price it wants. So why does it still produce at a point where MR = MC, just like a perfectly competitive firm?

In a natural monopoly, the government will try to set the price at which the demand...

In a natural monopoly, the government will try to set the price at which the demand curve intersects the monopolist's long-run marginal cost curve. long-run average total cost curve. long-run marginal revenue curve. long-run average fixed cost curve.

Why would it be economically efficient to require a natural monopoly to charge a price equal...

Why would it be economically efficient to require a natural monopoly to charge a price equal to marginal cost? Why do most regulatory agencies require natural monopolies to charge a price equal to average cost instead?

1. Identify one regulated, private natural monopoly from which your household buys services. How is the...

1. Identify one regulated, private natural monopoly from which your household buys services. How is the natural monopoly regulated? 2. How do consumers benefit from the government creating and regulating a natural monopoly in this case instead of just allowing competition? (What would happen if there was no monopoly?)

Fast-food stores often charge higher prices for their products in high-crime areas than they charge in...

Fast-food stores often charge higher prices for their products in high-crime areas than they charge in low-crime areas. Is this an act of price discrimination? Why or why not?

Question