Microeconomics Chapter 13 Natural Monopolies: Deregulation

Producers in markets welding their power may…

Restrict output

Raise prices

Stifle competition

Inhibit innovation

What are the two government interventions where market power prevails?

Focus on the structure of an industry

Focus on its behavior

Antitrust laws

Prohibit mergers and acquisitions that reduce competition (structure)

They forbid market practices that are anticompetitive (behavior)

Regulation

Focuses almost exclusively on behavior; It seeks to change market outcomes directly by imposing specific limitations on the price, output, or investment decisions of private firms

Natural monopoly

An industry in which one firm can achieve economies of scale over the entire range of market supply; a potentially desirable market structure

Distinctive characteristic of a natural monopoly:

It’s downward sloping ATC curve; large fixed costs and low marginal costs; MC curve always lies below the ATC curve

An unregulated natural monopoly…

Will produce output where MR = MC; will charge by the demand curve

Government options to regulate a natural monopoly:

Price regulation

Profit regulation

Output regulation

Price regulation

Government sets a maximum price. Price efficiency decides to set price = MC. To require efficient pricing a subsidy must be provided to the natural monopoly. Production efficiency is met when ATC is at a minimum.

Profit regulation

Set price = ATC. No profits. No subsidies.

Administrative costs:

The human and capital resources needed to represent a real opportunity cost

Compliance costs:

Regulated insures must expend resources to educate themselves about the regulations, to change their production behavior, and often to file reports with the regulatory authorities.

Efficiency costs:

The regulatory process itself may impede new technology, new marketing approaches, or improved production processes.

The push to deregulate is prompted by two factors:

The dynamic inefficiencies imposed by regulation stifles innovation and makes regulated industries less productive than desired.

Advancing technology often destroys the structural basis for natural monopoly, eliminating the reason for deregulation.

Interstate Commerce Commission (ICC) created by congress to…

Establish rates and routes for the railroads while limiting both entry to and exit from the industry.

The Railroad and Regulatory Act of 1976 aimed to…

Reduce government regulation

The Staggers Rail Act of 1980 granted…

Railroads more freedom to adjust prices and services.

The top 4 railroads move how much of all freight?

90%

The Federal Communications Commission (FCC):

Regulates phone services and prices

AT&T was a…

Monopoly until 1982

The Telecommunications Act of 1996:

Required the Baby Bells to grant rivals access to their transmission networks.

The Civil Aeronautics Board (CAB) was created in 1938 to…

Regulate airline routes and fares

Cross-subsidization:

Using high prices and profits on one product to subsidize low prices on another product.

CAB was successful at what?

Restricting entry into the industry.

Eliminating price competition between established carriers.

The Airline Deregulation Act of 1978:

Abounded entry regulation

CAB was eliminated in…

1984.

The largest 4 airline carriers increased from 35% in 1985 to…

60% in 2014

The Cable Communications Policy Act of 1984…

Deregulated cable tv, causing them to increase rates

The Cable Television Consumer Protection and Competition Act of 1992…

Gave the FCC authority to reregulate cable tv rates.

The Telecommunications Act of 1996 mandated that…

Rate regulation be phased out and end completely by March 1999. And then prices soared again.

The electricity industry is…

A natural monopoly and the latest target for deregulation.

California legislature…

Stripped local utility monopolies of their production capacities. Forced to sell plants. Made them dependent on third party producers.

California also put…

A price ceiling on the retail price its utilities could charge.

Blackouts caused California to…

Retake control of their power grid however needing to aim for cleaner energy.

Benefits from deregulation of the railroad, telephone, airline and electricity industries:

More competition

Lower prices

Improved services

Some regulations like ones imposed by the Food and Drug Administration…

Make drugs safer and benefit.