REGULATIONManagerial Economics
Lecturer: Jack Wu
REGULATION
natural monopoly potentially competitive market asymmetric information externalities public goods
NATURAL MONOPOLY
Average cost minimized with single supplier large scale/scope economies relative to market demand
MARGINAL COST PRICING
Require provider set price equal to
marginal cost supply quantity
demanded
demand
marginal cost
AVERAGE COST PRICING
Require provider set price equal to
average cost supply quantity
demanded
demand
marginal cost
average cost
RATE OF RETURN REGULATION
maximum rate of return on rate base disallowed profit returned to users
POTENTIALLY COMPETITIVE MARKET
Economies of scale/scope are small relative to market demand technology market demand
STRUCTURAL REGULATION
Bar franchise holder from vertically related markets
prevent monopoly from extending market power
MORAL HAZARD IN MEDICINE
supply
inflated demand
true demand
quantity (million hours a mth)
pri
ce (
$/h
our)
a
b
RESOLVING INFORMATION ASYMMETRY
mandatory disclosure regulation of conduct structural regulation
EMISSIONS
marginal cost to society
quantity (tons/year)
marg
. co
st/b
enefit
($/t
on)
35
8000
marginal benefit to society
EMISSIONS FEE
user fee
quantity (tons/year)
marg
. co
st/b
enefit
($/t
on)
35
8000
marginal benefit to society
ACCIDENTS
marginal cost to driver
quantity (units of care)
marg
. co
st/b
enefit
s
marginal benefit to society
PUBLIC GOODS
legal framework enables excludability copyright patent
trade-off incentive for knowledge creation economically efficient usage of information
PUBLIC PROVISION
For some public goods, practically difficult to enforce exclusion national defense clean air fireworks
CONGESTIBLE FACILITIES
social marginal cost varies with usage resolve through user fee = social marginal
cost time usage
DISCUSSION QUESTION
The demand for electric power in Sol Province is p = 20 - 20q, where p and q represent the price in thousands of dollars and quantity in Megawatt hours, respectively. Suppose that an electricity plant generates power at a constant marginal cost of $1000 per megawatt hour up to a capacity of 10 megawatt hours. Sol Province requires the plant to implement marginal-cost pricing.
DISCUSSION QUESTION
Illustrate the price and quantity with marginal cost pricing.
Suppose that demand grows to P=20-0.1q. At a price of $1000 per megawatt hour, what is the minimum number of plants needed to produce the quantity demanded?