3. Monopoly Regulation

Price Cap/Regulation Diagram

Prices can only increase by RPI or RPI-X or RPI ± K

Normally (and optimal) to set at allocatively efficient point

Evaluation of Price Cap/Regulation

Level of X/K

Cost of Regulation/Enforcement

Incentive to keep increasing X if firms are doing well to keep costs low

Regulatory Capture

How to show windfall tax on a monopoly diagram

Shift the MC curve upwards

Evaluation for Windfall Tax

Worsens monopoly outcomes (show higher prices and quantity diagrammatically)

Tax evasion/avoidance

Under-reporting Profit

Less Innovation (decrease in dynamic efficiency)

General Evaluation Points for Monopoly Regulation

Level of Information

Costs vs Benefits

Regulatory Capture

Benefits of Monopoly

Government Failure

General Policies and Consequences for Monopoly Regulation