regulation
DESCRIPTION
Regulation. Natural Monopolies. Breaking up a monopoly that isn’t natural is a good idea Ex. Microsoft buying Apple Why? The gains to the consumer outweigh the loss to the producer. Natural Monopolies. A monopoly in which large producers have lower average total costs than small producers - PowerPoint PPT PresentationTRANSCRIPT
Regulation
Natural Monopolies
• Breaking up a monopoly that isn’t natural is a good idea– Ex. Microsoft buying Apple
• Why?• The gains to the consumer outweigh the
loss to the producer
Natural Monopolies• A monopoly in which large producers have
lower average total costs than small producers
• Should these be broken up?• If they do, it would raise total costs• Ex. Small town government tries to prevent
a single company from dominating local gas supply – if it does, the cost of providing gas to its residents would raise
Increasing Returns to Scale Create Natural Monopoly
D
ATC
Quantity
Price, cost
Relevant output range
Natural monopoly. Average total cost is falling over the relevant output range
Natural monopolist’s break-even price
Natural Monopolies• With all monopolies, even natural monopolies,
a profit-maximizing monopolist acts in a way that causes inefficiency
• Consumers are charged a price that is higher than marginal cost and by doing so, prevents potential beneficial transactions
• How can better economic outcomes be established?
• Through public policy and public regulation
Public Ownership• The good is supplied by the government or by
a firm owned by the government– Ex. Amtrak, U.S. Postal Service, mass transit, water
supply systems and garbage collection at local levels
• Advantage of this: a publicly owned natural monopoly can set prices based on the criterion of efficiency rather than profit maximization
• Disadvantage: less eager than private companies to keep costs down
Price Regulation• Also known as industrial regulation• Limits the price that a monopolist is
chargedCommission
(Year Established)Jurisdiction
Federal Energy Regulatory Commission (1930)
Electricity, gas, gas pipelines, oil pipelines, water-power sites
Federal Communications Commission (1934)
Telephones, television, cable television, radio, telegraph, CB radios,
ham operators
State public utility commissions (50 states)
Electricity, gas, telephones
Price Regulation
• Public interest theory of regulation states that industrial regulation is necessary to keep a natural monopoly from charging monopoly prices and thus harming consumers and society
• Regulators seek to establish rates that will cover production costs and create a “fair” return to the price
Natural MonopoliesRate RegulationSocially Optimum Price
P = MCFair-Return Price
P = ATCDilemma of Regulation
REGULATED MONOPOLY
REGULATED MONOPOLY
Q
DMR
MCATC
P
Pric
e an
d C
osts
Monopoly PriceMR = MC
Qm
Pm
REGULATED MONOPOLY
Q
DMR
MCATC
P
Pric
e an
d C
osts
Fair-Return PriceNormal Profit Only
Qf
Pf
REGULATED MONOPOLY
Q
DMR
MCATC
P
Pric
e an
d C
osts
Socially-OptimumPriceP = MC
Qr
Pr
REGULATED MONOPOLY
Q
DMR
MCATC
P
Pric
e an
d C
osts
MR = MC
Fair-Return Price
Socially-OptimumPrice
Qm Qf Qr
Dilemma of RegulationWhich Price?
Pm
Pf
Pr
Costs and Inefficiency
• Unregulated firms have an incentive to reduce its costs at each level of output because it will increase its process
• Regulatory commission confined the regulated firm to a normal profit or “fair return” on the value of its assets
• Regulated firm has little or no incentive to reduce its operating costs
Perpetuating Monopoly• Problem with industrial regulation is that it
perpetuates monopoly long after the conditions of natural monopoly have ended
• What creates this?• Technological change– Trucks verse railroads, cell phones verse land lines
• Commissions set up to regulate– Protect regulated monopolies from new
competition by blocking entry or extending regulation
Legal Cartel Theory• Some industries seek regulation or want to
maintain regulation in order to form/maintain a legal cartel
• Why?• It can guarantee a profit• How?• Blocking entry• Illegal?• Private cartels are, govern-sponsored cartel
under regulation are not
Deregulation & Social Regulation
• Deregulation has produced large net benefits for consumers and society
• Specifically, airlines, railroads and trucking• Also in long-distance telecommunications,
cable television
• Deregulation of electricity has been a success with a few setbacks
Social Regulation• Is not concerns with natural monopolies but
with good and services produced, the impact of production on society and the physical qualities of the goods themselves
Commission(Year Established)
Jurisdiction
Food and Drug Administration 1906
Safety and effectiveness of food, drugs, and cosmetics
Equal Employment Opportunity Commission
1964
Hiring, promotion, and discharge of workers
Occupational Safety and Health Administration 1971
Industrial health and safety
Environmental Protection Agency 1972
Air, water, and noise pollution
Consumer Product Safety Commission
Safety of consumer products
Social Regulation vs. Industrial Regulation
1. Applies to more firms, applied “across the board” to all industries and affects more producers
2. Intrudes into the day-to-day production process– Ex. EPA
3. Social regulation expanded when industrial regulation waned
Optimal Level of Social Regulation
• What is the optimal level?
• Remember, it is recommended for any industry/firm to have it MB exceed its MC
• If the MB of social regulation exceeds MC, too little social regulation
• If MC exceed MD, too much!
So, is there a free lunch?
• Social regulation can produce higher prices, stile innovation, and reduce competition
• But, less government intervention is not always better than more government
Regulation Notes
Natural Monopolies
• Breaking up a monopoly that isn’t natural is a good idea
• Why?• The gains to the ____________outweigh
the loss to the ____________
Natural Monopolies• A monopoly in which large producers
have lower average total costs than small producers
• Should these be broken up?• If they do, it would raise ____________• Ex.
Increasing Returns to Scale Create Natural Monopoly
D
ATC
Quantity
Price, cost
Relevant output range
Natural monopoly. Average total cost is falling over the relevant output range
Natural monopolist’s break-even price
Natural Monopolies• With all monopolies, even natural
monopolies, a profit-maximizing monopolist acts in a way that causes ____________
• Consumers are charged a price that is higher than marginal cost and by doing so, prevents potential beneficial transactions
• How can better economic outcomes be established?
Public Ownership• The good is supplied by the government or
by a firm owned by the government– Ex.
• Advantage of this: a publicly owned natural monopoly can set ____________ based on the criterion of ____________ rather than profit ____________
• Disadvantage:
Price Regulation• Also known as ____________ regulation• Limits the price that a monopolist is
chargedCommission
(Year Established)Jurisdiction
Federal Energy Regulatory Commission (1930)
Electricity, gas, gas pipelines, oil pipelines, water-power sites
Federal Communications Commission (1934)
Telephones, television, cable television, radio, telegraph, CB
radios, ham operators
State public utility commissions (50 states)
Electricity, gas, telephones
Price Regulation
• Public interest theory of regulation states that ____________ ____________ is necessary to keep a ____________ ____________ from charging monopoly prices and thus harming consumers and society
• Regulators seek to establish rates that will cover production costs and create a “____________” return to the price
Natural Monopolies:Rate Regulation1. Socially Optimum Price
• ____________ 2. Fair-Return Price
• ____________ Dilemma of Regulation
REGULATED MONOPOLY
REGULATED MONOPOLY
Q
DMR
MCATC
P
Pric
e an
d C
osts
Monopoly Price____________
Qm
Pm
REGULATED MONOPOLY
Q
DMR
MCATC
P
Pric
e an
d C
osts
Fair-Return PriceNormal Profit Only
Qf
Pf
REGULATED MONOPOLY
Q
DMR
MCATC
P
Pric
e an
d C
osts
Socially-OptimumPrice____________
Qr
Pr
REGULATED MONOPOLY
Q
DMR
MCATC
P
Pric
e an
d C
osts
MR = MC
Fair-Return Price
Socially-OptimumPrice
Qm Qf Qr
Dilemma of RegulationWhich Price?
Pm
Pf
Pr
Costs and Inefficiency
• Unregulated firms have an ____________ to reduce its costs at each level of output because it will increase its process
• Regulatory commission confine the regulated firm to a normal profit or “____________” on the value of its assets
• Regulated firm has little or no ____________ to ____________ its operating costs
Perpetuating Monopoly• Problem with industrial regulation is that it
perpetuates monopoly long after the conditions of natural monopoly have ended
• What creates this?• ____________ ____________ – Ex.
• ____________ set up to ____________– Protect regulated monopolies from new competition
by blocking entry or extending regulation
Legal Cartel Theory• Some industries seek regulation or want to
maintain regulation in order to form/maintain a legal cartel
• Why?• ________________________ • How?• ________________________ • Illegal?• Private cartels are, govern-sponsored cartel
under regulation are not
Deregulation & Social Regulation
• Deregulation has produced large net benefits for ____________ and ____________
• Specifically, ________________________• Also in long-distance telecommunications,
cable television
• Deregulation of electricity has been a success with a few setbacks
Social Regulation• Is not concerns with natural monopolies but
with ____________ and ____________ produced, the impact of production on ____________ and the physical qualities of the ____________ themselves
Social RegulationCommission
(Year Established)Jurisdiction
Food and Drug Administration 1906
Safety and effectiveness of food, drugs, and cosmetics
Equal Employment Opportunity Commission
1964
Hiring, promotion, and discharge of workers
Occupational Safety and Health Administration 1971
Industrial health and safety
Environmental Protection Agency 1972
Air, water, and noise pollution
Consumer Product Safety Commission
Safety of consumer products
Social Regulation vs. Industrial Regulation
1. Applies to more firms, applied “across the board” to all industries and affects more producers
2. Intrudes into the day-to-day production process– Ex. ______________________
3. Social regulation expanded when industrial regulation waned
Optimal Level of Social Regulation
• What is the optimal level?
• Remember, it is recommended for any industry/firm to have it ______ exceed its ______
• If the ______ of social regulation exceeds ______, too little social regulation
• If ______ exceed ______, too much!
So, is there a free lunch?
• Social regulation can produce ______ prices, little ____________, and reduce ____________
• But, less government intervention is not always better than more government