Question
(a) Explain what is meant by the term “natural monopoly”.
(b) Construct a diagram showing the average and marginal cost curves, and the demand and marginal revenue curves for a natural monopoly. Use your diagram to explain why profit maximising behaviour by the monopolist is inefficient from society’s point of view.
(c) Suppose the government seeks to regulate the behaviour of the monopolist by price regulation. Consider the advantages and disadvantages of alternative criteria for setting the regulated price.
(b) Construct a diagram showing the average and marginal cost curves, and the demand and marginal revenue curves for a natural monopoly. Use your diagram to explain why profit maximising behaviour by the monopolist is inefficient from society’s point of view.
(c) Suppose the government seeks to regulate the behaviour of the monopolist by price regulation. Consider the advantages and disadvantages of alternative criteria for setting the regulated price.