chapter 29 slides
TRANSCRIPT
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Natural Monopoly
Natural Monopoly an industry in which
economies of scale are so important thatonly one firm can survive.
See Example 1 on page 29-2.
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An unregulated natural monopoly wouldattempt to maximize profits by producing
the quantity of output where marginal
revenue equals marginal cost.
Unregulated Natural Monopoly
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Unregulated Natural Monopoly
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Optimal Quantity
The optimal quantity of output occurs
where price equals marginal cost (andthus where marginal social benefit equals
marginal social cost).
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Optimal Quantity
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Deadweight Loss
Producing the profit-maximizing quantity of
output causes a deadweight loss.
The deadweight loss is equal to the area
between the demand curve and the
marginal cost curve for the amount of
underproduction.
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Deadweight Loss
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Regulating Natural Monopoly
If a natural monopoly is regulated to
produce the optimal quantity of output, thefirm will suffer an economic loss.
To keep the firm operating would require agovernment subsidy to the firm to
eliminate the economic loss.
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Subsidy to Achieve Optimal Quantity
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Zero Economic Profit
To avoid the need for a subsidy, natural
monopolies are often regulated to earn
zero economic profit (a normal rate of
return). This leads to problems:
1. The natural monopoly lacks incentives
to control costs.
2. The regulators may not be able to
obtain accurate information.
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Theories ofRegulation
1. Public interest theory. This theoryholds that regulation serves the publicinterest.
Assumes that elected officials are alwaysmotivated to act in ways that serve thepublic interest.
A great deal of government regulationdoes not seem to be serving the publicinterest.
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Theories ofRegulation
2. Capture theory. This theory holds that theregulatory agency will be captured (controlled)by the industry being regulated.
The firms in the regulated industry have aspecial interest in the policies of the regulatoryagency.
Regulations may be used to serve the best
interest of the regulated industry.
See Example 3 on page 29-6.
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Theories ofRegulation
3. Public choice theory. This theory holds
that regulation serves the best interest of
the government regulators.
Regulators would favor a regulatory
approach that led to more regulatory
power and a growing budget for the
regulatory agency.
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Costs ofRegulation
Regulations impose costs on the
economy:
1. Costs of the regulatory agency.
The costs to operate regulatory agencies
are paid by the taxpayers.
See the table on page 29-6.
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2. Costs to the regulated firms of
complying with the regulations.
These costs add to a companys cost of
production and are ultimately paid by the
consumers.
See Example 5 on page 29-7.
Costs ofRegulation
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3. Inefficiency costs if the regulations
reduce competition.
Regulation often reduces competition in
the regulated industry. A lack of
competition leads to higher prices for
consumers.
See Example 6 on page 29-7.
Costs ofRegulation
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4. Costs of unintended consequences ofregulations.
Regulations intended to accomplish adesirable goal may have unintendedconsequences that are undesirable.
See Examples 7 and 8 on pp. 29-7 and29-8.
Costs ofRegulation
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Deregulation
Deregulation will usually result in lower
prices due to increased competition.
See Examples 9A and 9B on page 29-8. Deregulation can be politically difficult to
accomplish.
Those who benefit from the regulation willact as a special-interest group to fight
deregulation.
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Sherman Act
Section 1 prohibits contracts,
combinations, and conspiracies in restraint
of trade.
Section 2 prohibits persons from
monopolizing, or attempting to
monopolize, a market.
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Sherman Act
The Supreme Court has interpreted the
Sherman Act as only prohibiting behavior
that unreasonably restrains trade.
Certain actions are held to always be
unreasonable restraints of trade and thus
are illegal per se.
See Example 11 on page 29-9.
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Sherman Act
Actions that are held not to be per se
violations of the Sherman Act are judgedunder the rule of reason.
See Example 12 on page 29-9.
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Clayton Act
The Clayton Act prohibits certain specificactions if the effect of the actions is tosubstantially lessen competition or tend to
create a monopoly. Section 3 of the Clayton Act restricts tying
agreements and exclusive dealingagreements.
Section 7 of the Clayton Act restrictsmergers.
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Types of Mergers
Whether a proposed merger will be judgedto substantially lessen competition or tendto create a monopoly depends largely on
the type of merger proposed: 1. Horizontal merger a merger of firms
competing in the same product market.
2. Vertical merger a merger of firms inthe same industry, but not at the samestage in the production process.
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3. Conglomerate merger a merger offirms that are not in the same industry.
Example 13: A merger of General Motorsand Ford Motor Company would be ahorizontal merger. A merger of GeneralMotors and Goodyear Tire and RubberCompany would by a vertical merger. Amerger of General Motors and Tonka Toyswould be a conglomerate merger.
Types of Mergers
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Today, the antitrust laws are enforced bythe Federal Trade Commission and by theAntitrust Division of the Department of
Justice.
Private parties who suffer damages
caused by antitrust violations may sue theviolator and recover three times thedamages proved.
Antitrust Law