ECON 201 1st Edition Lecture 12 Cont from Last Class I Monopolies Cont E Natural Monopoly A natural monopoly is an industry that exhibits large economies at scales such that ATC are declining over market levels of output EX New Hep C drug first and well recognized treatment o Patented and can only be sold by one single company o Had to do all of the research development tests and production There is no DWL where MC and the demand curve meet o At this point the price is below the average total cost o The firm will have negative revenue and will not be willing to sell for said price II Regulator of Monopolies A Solution for natural monopoly 1 Average cost pricing Normal rate of return These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute a b Give firms the right to set the cost equal to their average cost c Potential benefit reducing the amount of DWL more consumption and sales of the good allows for more transaction in the market place d Potential cost cronyism or moral hazard 2 Municipal production a Potential Benefit eliminate dead weight loss b Potential Cost hired officials 3 Price Cap a b Potential Benefits reduces dead weight loss and easy to enforce c Potential Costs very static only price you can charge as MC bumps up and down the price may not be appropriate B General Regulation of Monopoly 1 Sherman Act 1890 2 1 Still very much enforced 2 Cant restrict trade among states or foreign nations 3 Can t monopolize or attempt to monopolize can t actively pursue monopoly power 4 Both actions were made a felony Clayton Act 1950 1 Main act in affect now 2 Cannot engage in any of the following activities if they lessen competition 1 Price discrimination i e senior citizen discounts charging different prices to different individuals 2 Require purchases inputs from other firms 3 Restrict products a firm can sell 4 Restrict resale by location 5 Be a director of a competing firm
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