The natural monopoly may be regulated through price, profit, or output regulation. Price regulation — Marginal cost pricing is one form of price regulation, where the monopolist’s price is set equal to marginal cost at the quantity of output at which demand intersects marginal cost. The problem with marginal-cost pricing is that it usually results in the monopolist suffering a loss—a result that cannot be sustained for long. Profit regulation — A second possibility is to limit the monopolist to zero economic profit, either by taxing all economic profits away or by using average-cost pricing, which requires the monopolist to charge a price equal to average total cost. The problem here is that the monopolist has no incentive to minimize costs, since it will be allowed to pass all costs on to customers and gains no additional benefit by being cost-efficient. Output regulation — The third possibility is for government to mandate a quantity of output it wants the natural monopoly to produce. — The government can assure a particular level of output, and the monopolist can gain additional economic profits by lowering its costs. Briefly discuss the Capture, Public Interest, Public Choice theories of regulation. The Capture Theory of Regulation—This theory states that no matter what the motive for the initial regulation, eventually the agency responsible for the regulation will be “captured” (controlled) by the industry that is being regulated. As a result, the regulatory measures enacted will be affected by this relationship. Four points that support this theory are presented. The Public Interest Theory of Regulation—This theory holds that regulators are seeking to do, and will do through regulation, what is in the best interest of society at large. -------------------------------------------------
The Public Choice Theory of Regulation—This theory predicts that the outcomes of the regulatory process will tend to favor the regulators instead of either business interests or the public.
Elastic Demand (Ed > 1)—If the percentage change in quantity demanded is greater than the percentage change in price, demand is said to be elastic, and a change in price will cause a larger opposite change in quantity.
Inelastic Demand (Ed < 1)—If the percentage change in price is greater than the percentage change in quantity demanded, demand is said to be inelastic, and a change in price will cause a smaller opposite change in quantity.
Unit Elastic Demand (Ed = 1)—If the percentage change in quantity demanded equals the percentage change in price, demand is said to be unit elastic, and a change in price will cause a proportional change in quantity.
Perfectly Elastic Demand (Ed = ∞)—If quantity demanded changes dramatically in response to a change in price—indeed, in the purest sense, if quantity demanded drops to zero in light of a price change—demand is said to be perfectly elastic.
Perfectly Inelastic Demand (Ed = 0)—If quantity demanded is completely unresponsive to a change in price, demand is said to be perfectly inelastic. Market Structure| Short-Run Tendency of Price and MR| Short-Run Tendency of Price and MC| Long-Run Tendency of Price and ATC| Short Run Supply Curve| Long Run Supply Curve| Resource Allocative Efficient?| Productive Efficient?| Perfect Competition| P = MR| P = MC| P = ATC| MC above AVC| MC above ATC| Yes| Yes| Monopoly| P > MR| P > MC| P > ATC| Undefined| Undefined| No| No| Monopolistic Competition| P > MR| P > MC| P = ATC...