REGULATION Managerial Economics Lecturer Jack Wu REGULATION natural

REGULATION Managerial 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 average cost marginal 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 price ($/hour) supply a b inflated demand true demand quantity (million hours a mth)

RESOLVING INFORMATION ASYMMETRY mandatory disclosure regulation of conduct structural regulation

marg. cost/benefit ($/ton) EMISSIONS marginal cost to society 35 marginal benefit to society 8000 quantity (tons/year)

marg. cost/benefit ($/ton) EMISSIONS FEE user fee 35 marginal benefit to society 8000 quantity (tons/year)

ACCIDENTS marg. cost/benefit marginal cost to driver s marginal benefit to society quantity (units of care)

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 - 20 q, 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. 1 q. At a price of $1000 per megawatt hour, what is the minimum number of plants needed to produce the quantity demanded?