natural monopoly price regulation (full information).

what is first best pricing?

• regulator sets price = MC.

• no deadweight loss and allocative efficiency.

• Firms make a loss and fixed costs aren’t covered.

why does first best pricing fail?

• requires distortive taxation to fund subsidies to firms.

• redistribution from taxpayers to a monopolist.

• requires full information of costs. (unrealistic)

what is second best pricing?

• regulators set price=AC, maximise surplus subject to firm breaking even.

• deadweight loss is minimised but not removed.

• consumers pay more than MC.

• DWL increases in size with gap between AC and MC.

What is a multiproduct natural monopoly?

• firms that produce more than one product using the same fixed assets.

• faces different demand elasticities across products.

• common costs which cannot be assigned to any single product.

• must recover costs not by charging for its share but by raising prices above its marginal cost.

how does Ramsey pricing help to eliminate the problem posed by multiproduct monopolies?

raise prices more in markets of low elasticity. DWL will be low.

raise prices less in markets of high elasticity.

why is multiproduct Ramsey pricing difficult in practice?

• requires detailed elasticity information.

• Looks like price discrimination. raises fairness concerns.