Monopoly regulation SFLS online

1. I.) Perfect competition
II.) Monopolistic competition
III.) Oligopoly
IV.) Monopoly
Market Structure
Some regulations

2. IV.) Monopoly Regulation
Summary of some of the problems of monopolies...
Rent Seeking
is the act of obtaining special
treatment by the government to
create economic profit or to divert
挪用 consumer surplus or producer
surplus away from others.
Rent seeking does not always
create a monopoly, but it always
restricts competition and often
creates a monopoly.

3. IV.) Monopoly Regulation
Summary of some of the problems of monopolies...
Rent Seeking
Monopolies that are profit
maximizing are not producing
enough from a society’s
perspective and they are
charging too high of a price
Inefficient Market
Outcomes

4. Q
P
D
MR
MC
ATC
Abnormal profit - YES
Productively - NO
Efficient
(Q = min ATC )
Allocatively - NO
Efficient ( P = MC )
IV.) Monopoly Welfare Analysis
***Monopolies that are profit maximizing are not
producing enough from a society’s perspective and
they are charging too high of a price

5. IV.) Monopoly Regulation
Summary of some of the problems of monopolies...
Rent Seeking
Though it can mean more is
produced in the market, it often
is seen that monopolies are
taking advantage of those less
fortunate
Inefficient Market
Outcomes
Price
Discrimination

6. 歧视 Discrimination: treating people
differently based on some characteristic, e.g.
race or gender.
The characteristic used in price discrimination
is willingness to pay (WTP):
 A firm can increase profit by charging a higher
price to buyers with higher WTP.
IV.) Monopoly Power
Price Discrimination: selling the same good
at different prices to different
buyers.
It is sometimes possible for a monopoly to charge
different people difference prices

7.  What can public policy do about the problems and issues that occur
with monopolies?
 There are three common answers…
- Public Ownership
- Price Regulation and Anti- Trust Laws
- Do nothing
- Give them a Subsidy
IV.) Monopoly Regulation

8. the good is supplied by the
government or by a firm
owned by the government.
IV.) Monopoly Regulation
- Public Ownership
- Price Regulation and Anti- Trust Laws
- Do nothing
- Give them a Subsidy

9. Some companies can do things
cheaper being large and we
typically think governments can
do this best (but do they?)

10. Some companies can do things
cheaper being large and we
typically think governments can
do this best (but do they?)

11. Some companies can do things
cheaper being large and we
typically think governments can
do this best (but do they?)

12. Airlines are often oligopolistic
and not monopolies, but can act
like monopolies and are often
regulated for safety and prices

13. The Good:
- Can prevent unfair price discrimination and
monopoly profit seeking that hurts consumers
and also create more output that a profit
maximizing firm might not do.
IV.) Monopoly Regulation
the good is supplied by the
government or by a firm
owned by the government.
- Public Ownership
- Price Regulation and Anti- Trust Laws
- Do nothing
- Give them a Subsidy

14. The Good:
- Can prevent unfair price discrimination and monopoly profit
seeking that hurts consumers and also create more output
that a profit maximizing firm might not do.
The Bad:
- Often poorly run, no profit motive, can be
very inefficient and end up performing
worse.
- Sometimes doing nothing is better.
IV.) Monopoly Regulation
- No desire to innovate even if they have the
ability.
the good is supplied by the
government or by a firm
owned by the government.
Public Ownership

15. Rent Seeking
is the act of obtaining special treatment
by the government to create economic
profit or to divert consumer surplus
or producer surplus away from
others.
Rent seeking does not always create a
monopoly, but it always restricts
competition and often creates a
monopoly.
IV.) Monopoly and Competition
Rent Seeking behavior is just
another fancy word for
Corruption

17. Rules that control the prices
that monopolies can
charge or will break them
into smaller companies so
they will lose their
monopoly power.
Most common strategy used in the
U.S.
IV.) Monopoly Regulation
- Public Ownership
- Price Regulation and
Anti- Trust Laws
- Do nothing
- Give them a Subsidy

18. Rules that control the prices that
monopolies can charge or will break
them into smaller companies so
they will lose their monopoly
power.
The Good:
- Can prevent price discrimination, break
up monopolies and benefit consumers
and give them more choices.
IV.) Monopoly Regulation
- Public Ownership
- Price Regulation and
Anti- Trust Laws
- Do nothing
- Give them a Subsidy

19. Price Regulations and
Anti-Trust Laws
Rules that control the prices that
monopolies can charge or will break
them into smaller companies so
they will lose their monopoly
power.The Good:
- Can prevent price discrimination, break up
monopolies and benefit consumers and give them
more choices.
The Bad:
- Price controls are hard to determine
and sometimes hurt monopolies too
much.
- Best answer is usually to
break up the monopoly.
IV.) Monopoly Regulation

20. Rent Seeking is the act of obtaining special treatment
by the government to create economic
profit or to divert consumer surplus
or producer surplus away from
others.
Rent seeking does not always create a
monopoly, but it always restricts
competition and often creates a
monopoly.
IV.) Monopoly and Competition
Problem behavior that will
come up again and again…

21. Two most commonly used price controls
IV.) Monopoly Regulation
With private companies selling
durable goods, it is most
common to break up the
company somehow.
With other private companies or even
publicly owned companies that
produce a service such as, utilities
like water and power, price
controls are usually more
common.
1. Socially optimized pricing
also called Marginal cost pricing
2. Fair return pricing
also called Cost of Service regulations
- Public Ownership
- Price Regulation and
Anti- Trust Laws
- Do nothing
- Give them a Subsidy

22. They are owned publicly and
prices are regulated to prevent
abnormal profits make only a
normal profit

23. They are owned publicly and
prices are regulated to prevent
abnormal profits make only a
normal profit

24. They are owned publicly and
prices are regulated to prevent
abnormal profits make only a
normal profit

25. Q
P
D = P
MR
MC
ATC
IV.) Monopoly Welfare Analysis
*** Depending on the curves the monopoly can actually lose
money in this case and can cause the monopoly to go
bankrupt and shut down so this one is rarely used today.
A price ceiling that it is
allocatively efficient for
society
Socially optimal price
P = MC
A price that would be like if
it was a perfectly
competitive firm

26. IV.) Regulated Monopoly
Q
P
D =P
MR
MC
ATC
*** Depending on the curves the monopoly can actually lose
money in this case and can cause the monopoly to go
bankrupt and shut down so this one is rarely used today.
A price ceiling that it is
allocatively efficient for
society
Socially optimal price
P = MC
Loss
A price that would be like if
it was a perfectly
competitive firm

27. IV.) Monopoly Regulation
1. Socially optimized pricing
also called Marginal cost pricing
The Good:
- It is allocatively efficient, more is produced
at a lower price for everyone.
The Bad:
- The price is so low that most
monopolies would go out of
business, so the government would
have to give them a subsidy.
- A price that would be like if
it was a perfectly
competitive firm

28. IV.) Regulated Monopoly
Q
P
D = P
MR
MC
ATC
*** More then a monopoly would like to produce and less
then society would like to have. Most common way to
regulate a monopoly since they still get a normal profit.
A price ceiling that it is productively efficient, though
not allocatively efficient for society and still allows
the monopoly to get at least a normal profit
Fair return price
P = ATC

29. IV.) Monopoly Regulation
The Good:
- The output is higher and the price is
lower then an unregulated monopoly.
- The firm would still get a normal profit
so a subsidy is usually not needed.
2. Fair return pricing
also called Cost of Service
regulations

30. IV.) Monopoly Regulation
The Good:
- It is productively efficient, the output is higher and the
price is lower then an unregulated monopoly.
- The firm would still get a normal profit so a subsidy is
usually not needed.
The Bad:
- It may still be not enough output or
low enough prices for society’s
desires. Also calculating the price is
very difficult and inefficient and
prone 倾向于 to rent seeking.
2. Fair return pricing
also called Cost of Service
regulations

31. Monopoly outcomes may
seem unfair but
alternatives might have
untended consequences or
make the problem worse
IV.) Monopoly Regulation
- Public Ownership
- Price Regulation and Anti- Trust Laws
- Do nothing
- Give them a Subsidy

32. Rent Seeking is the act of obtaining special treatment
by the government to create economic
profit or to divert consumer surplus
or producer surplus away from
others.
Rent seeking does not always create a
monopoly, but it always restricts
competition and often creates a
monopoly.
IV.) Monopoly and Competition
By doing something, you promote more
of this behavior in trying to make the
new rules in your favor

33. IV.) Monopoly Regulation
- Public Ownership
- Price Regulation and Anti- Trust Laws
- Do nothing
- Give them a Subsidy
Monopolies usually don’t produce
enough of what society wants, mostly
because it is not profitable for them.
One market oriented solution to get
the to produce more is to make it
more profitable for them.
This basically means that the
government gives them money to
produce more.

34. Examples are: water company, power
company, many public goods.
IV.) Monopoly Regulation
Some goods and services are considered natural monopolies and are
the best way to provide people what they desire.
In the case of the electric company, it is most desirable to
produce as much as possible (allocative efficiency) and
not necessarily worry about profit, even though they
still must cover their costs.
1. Lump Sum Subsidies (can be a bad idea)
2. Subsidies per Unit (usually a better idea)
To get the monopoly to produce more (and not price
discriminate) the government will have to pay the
monopoly to do so.
Two ways to do so:

35. IV.) Monopoly Regulation
A one time payment to
the monopoly to
do with as they
wish.
This only affects fixed costs
AFC
ATC
1. Lump Sum Subsidies
(can be a bad idea)
2. Subsidies per Unit
(usually a better idea)

36. Q
P
D
MR
MC
ATC
IV.) Regulated Monopoly
One time payment that only
effects fixed costs.
Lump Sum
ATC
AFC
ATC
Before subsidy

37. Q
P
D
MR
MC
ATC
The output stays the same, it’s just now that the costs are
lower. To produce more what is needed is the shift the
marginal cost line to the right.
IV.) Regulated Monopoly
One time payment that only
effects fixed costs.
Lump Sum
ATC
AFC
ATC 1
After subsidy

38. IV.) Monopoly Regulation
A subsidy on each unit
produced.
This affects variable costs
and marginal costs
ATC
AVC
MC
1. Lump Sum Taxes
(can be a bad idea)
2. Subsidies per Unit
(usually a better idea)

39. Q
P
D
MR
MC
ATC
IV.) Regulated Monopoly
Before subsidy

40. Q
P
D
MR
MC
ATC
IV.) Regulated Monopoly
Subsidy on each unit
produced
Per Unit Subsidy
ATC
AVC
MC
ATC1
MC1
Before subsidy

41. Q
P
D
MR
MC
ATC
The idea is that the firm is still producing at the profit maximizing point but that
the output is now higher, as well as costs being lower for everyone that is not
price discriminated against.
IV.) Regulated Monopoly
Subsidy on each unit
produced
Per Unit Subsidy
ATC
AVC
MC
ATC1
MC1
After subsidy

42. Q
P
D
MR
MC
ATC
The idea is that the firm is still producing at the profit maximizing point but that
the output is now higher, as well as costs being lower for everyone that is not
price discriminated against.
IV.) Regulated Monopoly
Subsidy on each unit
produced
Per Unit Subsidy
ATC
AVC
MC
ATC1
MC1
After subsidyQ1

43.  So a little summary…
IV.) Monopoly Regulation

44. IV.) Monopoly Regulation
Price Discrimination
- Good for Society as more is produced
Capturing Economies of Scale
-Economies of scale can lead to natural monopoly.
-It is more efficient to regulate natural monopoly than to
break it up and make the industry competitive.
Strengthening the Incentives to Innovate
- Monopoly might be more innovative than competition.
-Innovation can create a monopoly.
Benefits of a Monopoly

45. IV.) Monopoly Regulation
Price Discrimination
- Bad for consumers and high prices
Not efficient from a society’s
perspective
- Does not produce as much as people want
Loses the Incentives to Innovate
-Monopoly might not innovate because it doesn’t
have to.
Downsides of a Monopoly

46.  Summarizing some of regulations to solve
downsides
- Public Ownership
- Price Regulation and Anti- Trust Laws
- Do nothing
- Give them a Subsidy
IV.) Monopoly Regulation

47.  Summarizing some of this
- Public Ownership
- Price Regulation and Anti- Trust Laws
- Do nothing
- Give them a Subsidy
IV.) Monopoly Regulation
The Good: The Bad:
- prevent unfair price
discrimination
- Often poorly run, no profit
motive, can be very
inefficient and end up
performing worse.

48.  Summarizing some of this
- Public Ownership
- Price Regulation and Anti- Trust Laws
- Do nothing
- Give them a Subsidy
IV.) Monopoly Regulation
The Good: The Bad:
- prevent unfair price
discrimination
- Price controls are hard to
determine and
sometimes hurt
monopolies too much.

49.  Summarizing some of this
- Public Ownership
- Price Regulation and Anti- Trust Laws
- Do nothing
- Give them a Subsidy
IV.) Monopoly Regulation
The Good: The Bad:
Sometimes doing nothing is
better, that the solutions
could be worse
Doesn’t solve the
problem at hand

50.  Summarizing some of this
- Public Ownership
- Price Regulation and Anti- Trust Laws
- Do nothing
- Give them a Subsidy
IV.) Monopoly Regulation
The Good: The Bad:
Per unit subsidies can
increase output in the
market
Lump sum subsidies
might not
increase output
in the market

51. That’s all for now
Thanks
