Natural monopolies are defined by a declining long-run average cost (AC) curve as below. Utilities such as electricity distribution and the train network are natural monopolies. That is, it does not make sense to have two or more distribution networks. It is a waste of resources. We can never reach the bottom of the long-run average cost curve (the minimum efficient scale) even with one provider. However, we still need to regulate natural monopolies or else they will charge the monopoly price (Pm). 1. Indicate on the diagram below the deadweight loss if the monopoly charges Pm- 2. The government has three pricing options in this simple example. First, they could make the monopoly charge P, which is known as Ramsey Pricing. Second, they could charge the competitive price Pc. Third they could provide the utility for free (Po). Discuss the merits of each option using the diagram to consider the implications of each pricing option on deadweight loss and profits. Price Pm g Pr Pc Po a 1 b 1 I MR Qm d Qr Qc I Qo AC MC Quantity

Natural monopolies are defined by a declining long-run average cost (AC) curve as below. Utilities such as electricity distribution and the train network are natural monopolies. That is, it does not make sense to have two or more distribution networks. It is a waste of resources. We can never reach the bottom of the long-run average cost curve (the minimum efficient scale) even with one provider. However, we still need to regulate natural monopolies or else they will charge the monopoly price (Pm). 1. Indicate on the diagram below the deadweight loss if the monopoly charges Pm- 2. The government has three pricing options in this simple example. First, they could make the monopoly charge P, which is known as Ramsey Pricing. Second, they could charge the competitive price Pc. Third they could provide the utility for free (Po). Discuss the merits of each option using the diagram to consider the implications of each pricing option on deadweight loss and profits. Price Pm g Pr Pc Po a 1 b 1 I MR Qm d Qr Qc I Qo AC MC Quantity

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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