This question has three parts, (a), (b) and (c).

Imagine that Company X is the monopoly producer of rare-earth metal in Country Y. Rare-earth metal is an input into several other products such as magnets. Country Y is considering if it is worth regulating the market in the form of pricecontrols. In order to make an appropriate assessment, the government wishes to obtain a monetary estimate of the cost and benefits of such an intervention. Using your tools as an economist, suggest how the government might go about obtaining such an estimate.

(a) Start by describing the theory behind the social loss caused by monopolies. You can use a graph to aid you in this description. (1 mark)

(b) If the government introduces a price ceiling in the market for rare earth, describe conceptually (with the aid of a graph): the consequences of the government introducing a price ceiling that improves social welfare; versus the consequences of the government introducing an overly restrictive price ceiling. (4 marks)

(c) Using the concept of causal chains and the cost-benefit equation learnt in the first part of the unit, describe how the government might go about assessing if a reduction in the monopoly's price through a specific price control, represented by , decreases or increases total welfare. You do not need to produce any real numbers here - just the equation and the description of each term in it. Because the market is not competitive, what difficulties would arise when trying to estimate producer surplus? Contrast to the case of the competitive market.