Lecture 35: Natural Monopoly

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Lecture 35 Natural Monopoly Public Utility
Regulation
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Natural Monopoly

• Natural Monopoly
• MES large relative to market

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Diagram 35.1
LRMC

LRAC
MES
MCm ACm
Qm
Output
Demand
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Natural Monopoly

• Natural Monopoly
• MES large relative to market
• many firms ?high costs

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Diagram 35.2
LRMC

LRAC
ACs
MES
MCs
MCm ACm
Qm
Qs
Output
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Natural Monopoly

• Natural Monopoly
• MES large relative to market
• many firms ?high costs
• monopolist ? high price/low output

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Diagram 35.3
LRMC

LRAC
MES
Pmono
MCm ACm
Qmono
Qm
Output
Demand
MR
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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)

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Diagram 35.4
LRMC

LRAC
MES
P LRAC
AC
P LRMC
Qm
Q
Q
Output
Demand
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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

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Public Utilities

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

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Electricity

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

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Regulation of Utilities

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

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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