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Lecture 35: Natural Monopoly

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Title: Lecture 35: Natural Monopoly


1
Lecture 35 Natural Monopoly Public Utility
Regulation
2
Natural Monopoly
  • Natural Monopoly
  • MES large relative to market

3
Diagram 35.1
LRMC

LRAC
MES
MCm ACm
Qm
Output
Demand
4
Natural Monopoly
  • Natural Monopoly
  • MES large relative to market
  • many firms ?high costs

5
Diagram 35.2
LRMC

LRAC
ACs
MES
MCs
MCm ACm
Qm
Qs
Output
6
Natural Monopoly
  • Natural Monopoly
  • MES large relative to market
  • many firms ?high costs
  • monopolist ? high price/low output

7
Diagram 35.3
LRMC

LRAC
MES
Pmono
MCm ACm
Qmono
Qm
Output
Demand
MR
8
Natural Monopoly
  • Natural Monopoly
  • MES large relative to market
  • many firms ?high costs
  • monopolist ? high price/low output
  • Public ownership
  • marginal cost pricing (P LRMC)
  • LRMC lt LRAC
  • break even (P LRAC)

9
Diagram 35.4
LRMC

LRAC
MES
P LRAC
AC
P LRMC
Qm
Q
Q
Output
Demand
10
Natural Monopoly
  • Natural Monopoly
  • MES large relative to market
  • many firms ?high costs
  • monopolist ? high price/low output
  • Public ownership
  • marginal cost pricing (P LRMC)
  • LRMC lt LRAC
  • break even (P LRAC)
  • X-inefficiency
  • Regulation of privately-owned utilities in UK
    USA

11
Public Utilities
  • natural monopolies
  • large capital cost
  • - network/grid
  • diminishing LRAC
  • single network efficient

12
Electricity
  • Generation
  • Transmission
  • Distribution
  • Supply
  • Natural monopoly restricted to network/grid

13
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20
Regulation of Utilities
  • Unregulated natural monopoly
  • ? allocative inefficiency (PgtMc)
  • marginal cost pricing
  • Regulation
  • ? UK OFCOM, OFGEM (OFGAS, OFFER), OFWAT
  • ? USA State utility commissions

21
United States
  • rate of return regulation
  • normal return on capital
  • average cost pricing (PACgtMc)
  • no incentives
  • TR TVC ? K
  • operating expenses
  • normal return
  • rate base
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