9. (16 marks)

Suppose Water Electric (WE), a private company, is the only hydro-electricity producer in City Y. She has made an initial investment of $5,000,000, and she operates with a constant marginal cost of $50 per unit of electricity produced. Assume other costs are neglectable.

a. Graphically show the profit-maximizing output level, price and her positive economic profit. Label clearly key elements of the graph. Based on this graph, briefly explain why WE is a natural monopoly. (7 marks)

b. Some economists believe that natural monopolies like WE create harm to the society. The government should impose regulations, including price controls, on them. Other economists argue that it is essential to allow natural monopolies to operate freely without direct intervention. With reference to the case of WE, outline the economic debates on regulating a natural monopoly. (9 marks)

No calculation is required for Question 9.