Chapters 15

1

• Chapters 15 19.7 Using Noncompetitive Market
  Models Regulation

2
Graphical Depiction of Efficiency Loss Due to
Single-Price Monopoly
ConsumerSurplus
Economic Profit
Efficiency Loss
LACLMC
Q
QC
3
Regulation of (Natural) Monopoly

• State ownership and management (e.g. elected
  boards)
• Downside is weakened incentives for profit
  leading to X-inefficiency (when firms fail to
  attain maximum output for a given combination of
  inputs)
• Rate of return regulation - prices are set to
  allow monopolist to earn a set (competitive) rate
  of return on invested capital
• Downside is that regulators cant be sure of the
  competitive rate (if rate is set too high then
  price is too high, if set too low then monopolist
  will eventually go out of business)
• Exclusive contracting (with natural monopoly) -
  have competition for who gets to be the exclusive
  contractor
• Enforcement of antitrust laws - effort to prevent
  monopolies from forming (note that this is not
  effective for natural monopoly)

4
Causes of Economic Inefficiency

• Market power - firms with market power do not
  marginal cost price (PgtMC)
• As a consequence, the relative price in the
  industry where there is market power, call it
  Pp/Pc gt MCp/MCc, where Pc and MCc are the price
  and marginal cost in a perfectly competitive
  industry
• Implies that more of the market power good should
  be produced and less of the perfectly competitive
  good since consumers would like to trade for more
  of it
• Imperfect information - consumers may not know
  how much utility they will get from consumption
  of a good
• Externalities/public goods - consumption/productio
  n of a good might impact other than the
  consumer/producer, but this impact is not taken
  account of in the production/consumption so the
  market does not lead to efficient allocation