r egulation managerial economics lecturer: jack wu

REGULATIONManagerial Economics

Lecturer: Jack Wu

REGULATION

natural monopoly potentially competitive market asymmetric information externalities public goods

NATURAL MONOPOLY

Average cost minimized with single supplier large scale/scope economies relative to market demand

MARGINAL COST PRICING

Require provider set price equal to

marginal cost supply quantity

demanded

demand

marginal cost

AVERAGE COST PRICING

Require provider set price equal to

average cost supply quantity

demanded

demand

marginal cost

average cost

RATE OF RETURN REGULATION

maximum rate of return on rate base disallowed profit returned to users

POTENTIALLY COMPETITIVE MARKET

Economies of scale/scope are small relative to market demand technology market demand

STRUCTURAL REGULATION

Bar franchise holder from vertically related markets

prevent monopoly from extending market power

MORAL HAZARD IN MEDICINE

supply

inflated demand

true demand

quantity (million hours a mth)

pri

ce (

$/h

our)

a

b

RESOLVING INFORMATION ASYMMETRY

mandatory disclosure regulation of conduct structural regulation

EMISSIONS

marginal cost to society

quantity (tons/year)

marg

. co

st/b

enefit

($/t

on)

35

8000

marginal benefit to society

EMISSIONS FEE

user fee

quantity (tons/year)

marg

. co

st/b

enefit

($/t

on)

35

8000

marginal benefit to society

ACCIDENTS

marginal cost to driver

quantity (units of care)

marg

. co

st/b

enefit

s

marginal benefit to society

PUBLIC GOODS

legal framework enables excludability copyright patent

trade-off incentive for knowledge creation economically efficient usage of information

PUBLIC PROVISION

For some public goods, practically difficult to enforce exclusion national defense clean air fireworks

CONGESTIBLE FACILITIES

social marginal cost varies with usage resolve through user fee = social marginal

cost time usage

DISCUSSION QUESTION

The demand for electric power in Sol Province is p = 20 - 20q, where p and q represent the price in thousands of dollars and quantity in Megawatt hours, respectively. Suppose that an electricity plant generates power at a constant marginal cost of $1000 per megawatt hour up to a capacity of 10 megawatt hours. Sol Province requires the plant to implement marginal-cost pricing.

DISCUSSION QUESTION

Illustrate the price and quantity with marginal cost pricing.

Suppose that demand grows to P=20-0.1q. At a price of $1000 per megawatt hour, what is the minimum number of plants needed to produce the quantity demanded?