ANSWER ONLY THE QUESTIONS FROM 1-7 THAT IS SHOWN AT LAST OF THE PAGE.

'1 A natural monopoly occurs when economies of scale are so large that one rm can provide the good more cheaply than several competing rms. 8 Example: water supplied to your house How efcient would it be to have 7 water companies competing for your business - each with their own water distribution pipes? It is clearly much cheaper if there is just one company and one set of pipes. If multiple rms are competing, one will expand and be able to produce more cheaply... driving the others out of business. As that process continues. the market would \"naturally\" result in a oneerm monopoly. And this is a natural monopoly. The problem is that once the industry is monopolized, the remaining rm may not charge a price anywhere near marginal cost. They will charge the monopoly price...to make monopoly prots! The key feature of a natural monopoly is declining average (total) cost (AC) over the range of demand. Natural monopolies typically have very high xed costs (the water treatment plant. the water pipe infrastructure) and low marginal costs (the cost of hooking up one more house to the grid and then supplying water are relatively low). Natural monopolies present us with the problem that leastecost production necessitates one rm producing for all... but one rm producing for all results in a pure monopoly! What do we do? Well, typically these industries are either simply provided by the government or allowed to be privately owned but regulated by the government. Regulated means, among other things, the rates charged to consumers are set by the government regulator , not the n'n. Public utilities are traditionally natural monopolies. lfyou live in Northern California there has been a lot of discussion around Pacic Gas 8: Electric (PG&EJ in recent years. They area natural monopoly regulated by the California Public Utilities Commission (CA PUC). Telephone service, gas 8: electric, mail delivery, a bridge, trash pickup... all of have been (at one time at least} considered natural monopolies. Whether or not internet providers should be considered public utilities (with greater regulation) is a current debate being played out. Regulations impose costs that alter the competitive landscape. Those that worry about this may argue against doing much to prevent monopolization and would downplay the "deadweight loss" involved. Over time rms nd a way to break into protable industries - so letting things go on their own may be preferable to government intervention. What is a monopoly in one era may not be a decade later (phone services, Microsoft). Prior to the 1980s if you wanted a phone in the US you used AT&T. They were the only provider. A regulated natural monopoly. Over time technology has allowed for greater competition through cell towers and internet cable such that traditional land lines were no longer the one and only way to make phone calls. While still regulated by the FCC there is now competition amongst different providers. When and how to go about allowing competition will be a case by case determination. The question is what price the regulators should force the rm to charge. From society's perspective it is efcient to have price equal to marginal cost [P = MC]. Review the efciency ofmginal cost pricing. So what orice should we force a natural monopolist to charge? Given the efciency of marginal cost pricing, you might want to say that we should force the natural monopolist to set price equal to MC. There is a problem. however (hey, it there were no problems then I would be out of a lot! - which would be terrible except for the tact that there would be no problems). - Natural monopolies are characterized by a falling ATC. . ATC Falls onlywhen MC is less than ATC. - So if P : MC and MC is less than ATC then the rm must have a negative economic prot. In other words. if the regulatory agencies were to force rms to charge MC, no rm would voluntarily stay in the industry [as they have economic losses). How do we get out of this dilemma? We could just have the government nationalize the industry and provide the good from taxes or user fees (US Postal Service). Europe has done this more than the US. We could also Force the rm to charge marginal cost and then provide a government subsidy to allow the rm to make a normal prot. In the US we typically allow rms to set P = ATC. This would result in a price such that the ATC hits the demand curve. This results in no economic prot. This strategy is called \"cost-plus" pricing. The price is designed to cover the rms accounting costs PLUS a \"fair" return. in our economic jargon, that is equivalent to are allowing rms to earn a normal prot. Mjmfoodie explains all this brilliantly right here: Episode 28: Regulation tea Watch on II'I'nuTutm Application to PG&E (Pacic Gas & Electric - a Northern California utility company) In this video I argue against turning PGEE into a government-run entity - for the reason that separating the service from the government most likely provides a better chance for oversight. I could be wrong... and you do not have to agree with me. (But i do ask For you to understand the economics and logic of the argument) lguess the more important point that I want to make is that to some extent it does not matter if it is run by the private sector or by government . either way it is a challenge to "force" it to provide low cost and high quality service because there is no competition. What do you think? Do any of you have good or bad examples of government run products/services? We have many international students here I think... always interesting to hear about how other countries work! Apologies . the sound cuts out at the end but i think you get the jist of my argument. Imagine you read the following article in your local newspaper... Beer for All AP LosAltos Hills, CA - innovative beer suppliers at Foothill College have created a network of tubes to deliver beer on tap to every student living in one of the massive campus dormitories. The xed costs of investment were $1000 but allow beer to be then be produced at constant marginal cost of $1 / beer. The beer supplier hopes to earn massive prots but some students have begun a campaign to regulate the price of beer because. as one student put it. \"Beer is good...\" foont'd p 3} 510 56 1. Based on the article, graph ATC and MC (as structured MC is the same as AVC). Redraw this graph on paper; 53 $1 2. What happens to ATC as output rises? 3. What industry structure are we replicating here (despite its ridiculousness) 4. Assume demand is given by the relationship; P = 10 7 005121. This means MR = 10 , .DIQ. Graph these also. 5. If only one unregulated protimaximizing rm exists, what price and output level can we expect? Is this "efcient\" for society? Why (not)? 6. Suppose the government forced this rm to charge at P = MC. Shade in the rm's prots. 7. Think of an alternative pricing schemethat avoids the problem in #6