In: Economics
8. Explain the three types of regulations on natural monopolies (price, profit, quantity) and their potential dangers (how the natural monopoly may respond).
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A monopoly market exists when a specific person or enterprise is the only supplies of a particular commodity.a monopolistic have full control over price, barrier to entry, no close substitute, full control suppi, firm is itself ban industry, downward sloping demand curve.
Natural monopoly have fixey costs are very relative to their variable costs. Most efficient number of yin the industry is one.
Regulations on natural monopolies that is price, profit and quality are given below:-
A natural monopoly will maximize profits by producing at the quantity where MR=MC( marginal revenue equal to marginal cost). The economy would became less productively efficient. The good is being produced at a higher average cost.
Two small firm always have higher average cost of production than one larger firm for any quantity of total output the antitrust authorities must worry that splitting the natural monopoly in pieces. Alternatively, temwo firms in a Market may discover subtle way of coordinating their behaviour and keeping price high.
Another regulation may decide to set price and quantity produced for this industry. The regulator will try to choose a point along the market demand curve benifits both consumers and broder social intrest. The regulator requires that the firm produces the quantity of output where marginal cost crosses the demand curve. Which equals to marginal cost at that point this rule is appealing because it requires price to be set equal to marginal cist, which is what it would assure consumers a higher quantity and lower price than at the monopoly choice.
In the case of natural monopolies trying to increase competition by encouraging new entrants into the market creat a potential loss of efficiency, bad quality of good, less effective, high price of commodities etc...