⏱️ November 15, 2020
A natural monopoly, as mentioned in Unit 4, is a market where the most efficient number of firms in the industry is only one. This is often due to high start-up costs. An example of a natural monopoly would be an electric company; it is more efficient for 1 firm to provide power to an entire city rather than having multiple firms with overlapping power grids.
The graph above shows a natural monopoly. Point A is where a monopoly would produce when they are unregulated by the government. Point B represents the fair-return point, where the monopoly would earn a normal economic profit or break even. Point C represents the perfectly competitive or socially optimal point on a monopoly graph. There is no deadweight loss at Point C.
The government can set a price ceiling that can cause a natural monopoly to produce the socially optimal output. The monopoly will need a lump-sum subsidy to produce here.
Other government interventions include price ceilings, price floors, per-unit taxes/subsidies, and lump-sum taxes, as discussed in Unit 2. Per-unit taxes and subsidies affect variable costs, thus affecting the MC, ATC, and AVC curves, while lump-sum taxes and subsidies only affect fixed costs, thus affecting only the ATC and AFC curves.
💸 Unit 1: Basic Economic Concepts
1.0Unit 1: Basic Economic Concepts
1.1Basic Economic Concepts: Scarcity
1.2Resource Allocation and Economic Systems
1.3Production Possibilities Curve (PPC)
📈 Unit 2: Supply and Demand
2.4Price Elasticity of Supply
2.6Market Equilibrium and Consumer and Producer Surplus
2.7Market Disequilibrium and Changes in Equilibrium
2.8The Effects of Government Intervention in Markets
⚙️ Unit 3: Production, Cost, and the Perfect Competition Model
3.6Firms' Short-Run Decisions to Produce and Long-Run Decisions to Enter or Exit a Market
📊 Unit 4: Imperfect Competition
4.1Introduction to Imperfectly Competitive Markets
💰 Unit 5: Factor Markets
5.2Changes in Factor Demand and Factor Supply
5.3Profit-Maximizing Behavior in Perfectly Competitive Factor Markets
🏛 Unit 6: Market Failure and Role of Government
6.1Socially Efficient and Inefficient Market Outcomes
6.3Public and Private Goods
6.4The Effects of Government Intervention in Different Market Structures
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