The US Postal Service (USPS) operates a network similar to an electric, gas or water utility. It is required to provide delivery to nearly all homes in the US and is given a monopoly over home delivery of first-class mail. Since the USPS is a legal monopoly, its prices are regulated by the Postal Rate Commission. In the 1970s, the USPS warned the US Congress that electronic communication would eventually affect its ability to maintain service. While the USPS vastly overstated the negative effect of e-mail on its service offeringsUSPS predicted that by 1985 it would no longer deliver first class mailby the mid-2000s the effect on its revenues was unmistakable. The US Congress stepped in and restructured the USPS by allowing it some pricing flexibility, e.g., the forever stamp, but at the same time required the post office to: (1) pay a large fixed sum each year to the Federal government employee retirement fund to prefund benefits for retirees of the USPS (and many will argue other government agencies); (2) maintain delivery to unprofitable portions of the country; (3) add Saturday mail service. The effect of these requirements was to add roughly $5B to its annual costs. (For comparison, its net loss in 2017 was about $2.7B.)

a. What happened to the USPS average and marginal cost curve as a result of the US Congress decision? (Hint: which of theses changes cause fixed cost and which are marginal?)

b. Some have argued that the USPS under prices shipping services to large shippers, such as Amazon. Large shippers, including Amazon, do most of the variable cost work themselves (i.e., filling the packages, properly marking the packages, delivering the packages to the USPS warehouses, etc.) what is left is largely, though not entirely, the use of the USPS's fixed network. Suppose a politician claims that Amazon is being undercharged because the USPS average cost of delivering a package is $1.25 higher than it charges Amazon. What do you make of this claim?

c. Consider this question from a regulatory perspective. Suppose that the post office has two types of customers: large shippers; and all other shippers. Large shippers, such as Amazon, have alternatives to the USPS. For example, in many areas of the country Amazon operates its own delivery network. Moreover, as a large shipper, Amazon would likely have some pricing power over other shippers such as UPS. This suggests that its demand is elastic. Other shippers likely do not have these alternatives and their demand is likely inelastic. Suppose the USPS petitions its regulator to lower the price charged to Amazon and raise the price to other shippers. Is this a good policy from an economic perspective? Explain