question archive Natural monopolies give rise to a monopoly that is socially justifiable
Natural monopolies give rise to a monopoly that is socially justifiable
Subject:MarketingPrice:4.88 Bought17
Natural monopolies give rise to a monopoly that is socially justifiable. Two telephone companies, or gas companies, or water companies, or electricity companies in the same city would be highly inconvenient and costly, as long as transmission requires wires and pipes. In such instances, it makes sense for government to grant exclusive franchises and then regulate the resulting monopoly through price to ensure the public interest is protected. A regulatory commission may attempt to establish the legal price for the monopolist that is equal to marginal cost at the quantity of output chosen. This is called the "socially optimal price." However, government has since deregulated the gas and electric companies. What has been the economic impact on pricing?
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
With government regulation, the price for the basic utilities is set up by the government to maximize the social benefit. Thus, in this case, the Price = Marginal Cost = Minimum of average cost for a specified number of units of output.
However, when the government deregulates, the price of public utilities tends to rise up to a certain number of the units of output where the Marginal Cost is the same as the Marginal Revenue. Thus, after deregulation, the firms tend to focus more on profit maximization than on maximizing social welfare.
