The three graphs below illustrate the market for electricity. The distribution of electricity is a natural monopoly; therefore, to take advantage of lower production costs, it is efficient to have only one firm in the market. Unfortunately, if a monopoly were allowed to provide electricity, it would charge a higher price and provide a smaller amount of electricity than would be desirable. In other words, the unregulated monopoly would charge the monopoly's profit-maximizing price. To avoid this, the government will allow a single firm to provide electricity, but the government will regulate the price. Let’s compare possible regulatory solutions.
The three graphs below illustrate the market for electricity. The distribution of electricity is a natural monopoly; therefore, to take advantage of lower production costs, it is efficient to have only one firm in the market. Unfortunately, if a monopoly were allowed to provide electricity, it would charge a higher price and provide a smaller amount of electricity than would be desirable. In other words, the unregulated monopoly would charge the monopoly's profit-maximizing price. To avoid this, the government will allow a single firm to provide electricity, but the government will regulate the price. Let’s compare possible regulatory solutions.
Chapter28: Antitrust And Regulation
Section: Chapter Questions
Problem 8E
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Question
The three graphs below illustrate the market for electricity. The distribution of electricity is a natural monopoly ; therefore, to take advantage of lower production costs, it is efficient to have only one firm in the market. Unfortunately, if a monopoly were allowed to provide electricity, it would charge a higher price and provide a smaller amount of electricity than would be desirable. In other words, the unregulated monopoly would charge the monopoly's profit-maximizing price. To avoid this, the government will allow a single firm to provide electricity, but the government will regulate the price. Let’s compare possible regulatory solutions.
Transcribed Image Text:Suppose the monopoly is unregulated. Use the plot point tool to indicate the monopoly's profit-maximizing price and output on the
demand curve. Then use the draw area tool to draw the monopoly's profit.
To refer to the graphing tutorial for this question type, please click here.
Electricity Market
Price
16
15
14
13
12
11
10
9.
8
7
4
AC
3
MC
1
MR
うるる をる
Screenshot
16
10
3
LO
Transcribed Image Text:Now, suppose the monopoly is regulated. Suppose the government wants to set a price such that it generates the greatest welfare for
society. Use the plot point tool to indicate the regulated price and output on the demand curve. Then use the draw area tool to draw the
monopoly's loss.
Electricity Market
Price
16
15
14
13
12
11
10
9
7
4
AC
3
MC
2
1
MR
లో
Quantity (in millions)
16
15
13
11
10
9
1
3
Co
LO
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