Natural Monopoly

This set of flashcards covers key vocabulary related to natural monopoly and concepts from public sector economics as discussed in the lecture.

Natural Monopoly

An industry where the production of a good or service by a single firm minimizes cost, supplying the entire market at a lower average cost (AC).

Market Failure

Occurs when the assumptions of perfect competition are violated, leading to an inefficient allocation of resources.

Subadditive Cost Function

A cost function is subadditive if it is cheaper for a single firm to produce a particular output than for two firms to produce it separately.

Marginal Cost Pricing

A pricing method where price equals marginal cost (P = MC), which can lead to losses for the firm in cases of natural monopoly.

Average Cost Pricing

Setting price equal to average cost (P = AC) which allows for zero profit but can entail efficiency loss if average costs exceed marginal costs.

Price Cap Regulation

A regulatory method that sets a maximum allowable price for a good or service, incentivizing firms to reduce costs.

Economies of Scale

A situation where increasing production lowers the average cost per unit due to high fixed costs being spread over more units.

Temporary Natural Monopoly

A natural monopoly that may disappear with changes in demand or advancements in technology.

Public Enterprise

A government-owned and operated entity that manages a natural monopoly but faces similar challenges to average cost pricing.

Two-part Tariff

A pricing scheme consisting of a per unit charge plus a fixed fee, designed to cover both marginal costs and fixed costs.