![]() ![]() ![]() Alternatively, regulation could be imposed to limit the price to p 2, the lowest break-even price. The product could be subsidized: Subsidies are used with postal and passenger rail services in the United States and historically for many more products in Canada and Europe, including airlines and airplane manufacture. At this price, however, the average total cost exceeds the price, so that a firm with such a regulated price would lose money. We see the need for a subsidy in Figure 15.3 "Natural monopoly" because the price that maximizes the gains from trade is p 1, which sets the demand (marginal value) equal to the marginal cost. An immediate problem with regulation is that the efficient price-that is, the price that maximizes the gains from trade-requires a subsidy from outside the industry. Historically, the United States and other nations have regulated natural monopoly products and supplies such as electricity, telephony, and water service. If the monopoly price is not sustainable, the monopoly may engage in limit pricing, which is jargon for pricing to deter (limit) entry. The feasibility of entry, in turn, depends on whether the costs of entering are not recoverable (“ sunk”) and how rapidly entry can occur. A monopoly price is not sustainable if it were to lead to entry, thereby undercutting the monopoly. The monopoly price may or may not be sustainable. The monopolist would like to price at pm, which maximizes profits. In this case, the average total cost of a single firm is lower than if two firms were to split the output between them. An example is illustrated in Figure 15.3 "Natural monopoly". arises when a single firm can efficiently serve the entire market because average costs are lower with one firm than with two firms. How is the monopoly price constrained by the threat of entry?Ī natural monopoly Situation that arises when a single firm can efficiently serve the entire market because average costs are lower with one firm than with two firms.When there is a scale economy, what market prices will arise?. ![]()
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