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Assignment Regulation Of Monopolies

   

Added on  2020-02-24

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Running Head: REGULATION OF MONOPOLIES1Regulation of MonopoliesStudent’s NameInstitutional Affiliation

REGULATION OF MONOPOLIES 2IntroductionMonopoly is a term frequently used by economists to define a state where the exists only one producer of a product which owns no close substitute or a state where there is only one company in an industry with the company possessing no substitute. Example of monopoly products includes electricity, cable television and water. These firms own certain characteristics: they have no close substitution, one seller with many buyers, there is a restriction of entry of newfirms because of the substantial barriers, and they need no advertisement as they have got the right hand to control the market, they are the price makers. In some situations, enhance monopoly for national security issues, to attain economies of scale for international competition. A natural monopoly exists where there is a vast extension of output for which economies of scaleare experienced, and therefore it is sensible that only one firm functions (DiLorenzo, 1996). Analyze this topic I selected some sources based on the content, validity, and relevance. AnalysisNatural monopolies are favorable to the industries in which the largest supplier gets cost benefits must be restricted to for several reasons: By the conventional, mainstream economic theory, the fundamental economic harm originating from monopoly is because of marginal cost and dead weight loss (Posner, 1974). Deadweight loss is the loss resulting from the unrealized gains from trade. Another reason for regulation is for economic motivation: to enhance allocative efficiency. The regulation also creates new welfare because there exists more business in the market. Unregulated natural monopoly would try to seek to maximize their profits by outputting value of output where marginal cost is equal to

REGULATION OF MONOPOLIES 3the marginal revenue. This is the choice profit – maximizing companies would prefer though it comes with a disadvantage of a huge deadweight loss (Demsetz, 1968).$8 -7 -6 -5 -4 -3 -2 -1 - 0 ׀׀׀׀׀׀׀׀׀׀ 0 10 20 30 40 50 60 70 80 90 100PUN$Quantity (thousands)D = PQUNMRMCATCFigure 1Unregulated natural monopolyFor the profit maximizing or unregulated policy option, the company will set their prices by aspiring to attain MR=MC Where; MR (marginal revenue) is the excess money obtained by selling an extra unit while MC (marginal cost) is the surplus cost of selling an additional unit. Simply if the money acquired is greater than or equal to the excess cost of availing the good or service to the consumer, then the exchange will be viable made (Joskow, 2007)..

REGULATION OF MONOPOLIES 4$8 -7 -6 -5 -4 -3 -2 -1 - 0 ׀׀׀׀׀׀׀׀׀׀ 0 10 20 30 40 50 60 70 80 90 100PUNPOPT$Quantity (thousands)D = PQUNQOPTMRMCATCDeadweightLossFigure 2 Dead weight lossProducing the profit-maximizing quantity of product causes a deadweight loss. The deadweight loss is equivalent to the region between the demand curve and the marginal cost curve for the underproduction amount. For the second pricing option in a natural monopoly: optimal quantity for society, the monopoly model produces the quantity where price is equivalentto marginal cost (and therefore marginal social cost equals to marginal social benefit). P=MC This option becomes the best deal for a consumer as the price is low and therefore no deadweightloss is experienced (Demsetz, 1968).

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