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What is a monopoly
a single firm who supplies the entire market
with high barriers to enter
has market power which can exploit consumers
what is a natural monopoly
a monopoly with increasing returns to scale and economies of scale
what is the difference between P, MR, and MC of competitive and monopoly firms
competitive — P=MR=MC
monopoly — P > MR=MC
attributes of a monopoly
higher prices
less supply
extracts rent
has lower econ surplus but presence of deadweight loss
how does the government intervene?
public production — where the govenrment doesnt have to be efficent
monopoly regulations
how would monopoly regulations work?
firms would operate where P=AC (not MC because may loss) which lowers the price and increases quantity sold
issues in regulation
admin costs
asymmetric information
rise of distortive behavior
what could be the information disadvantage
opportunity costs
managerial efforts
being a “high cost” firm (allows them to have higher prices)
what are the 2 polar cases of regulatory mechanisms
cost of service regulation
fixed price / price cap
explain cost of service regulation
setting price exactly to P=AC
gov will give back the realized cost to the monopoly which solves advese selection, however it does not provide incentives for manager to be efficient
explain fixed prices / price cap
sets an ex ante price that the firm will be allowed to charge
this provides incentives to lower costs as the profits will be set thus solving moral hazards, however it does not extract rent from the firm
what is incentive regulation mechanism
performance based regulation — provides incentives to reduce costs via setting of performance standards, however it requires even more information
Note 
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