9. Regulating a natural monopoly Consider the only electric company in a small town, which you can assume operates as a natural monopoly. The following graph shows the demand curve for electricity services per month, as well as the provider's marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve. PRICE (Dollars per subscription) 100 90 80 70 50 40 20 10 ATC MC MR D 0 0 2 4 6 8 10 12 14 16 18 20 QUANTITY (Thousands of subscriptions) ? Suppose the government has elected not to impose regulations on the industry, and so the firm faces no regulatory constraints in maximizing profits. Complete the first row of the following table. Pricing Mechanism Profit Maximization Marginal-Cost Pricing Average-Cost Pricing Short Run Quantity Price (Subscriptions) (Dollars per subscription) Profit Long-Run Decision Suppose now that the government decides to require the monopolist to set its price equal to marginal cost. Complete the second row of the previous table. Suppose now that the government decides to require the monopolist to set its price equal to average total cost. Complete the third row of the previous table. Under average-cost pricing, the government will raise the price of output whenever a firm's costs increase, and lower the price whenever a firm's costs decrease. Over time, under the average-cost pricing policy, what will the local electric company most likely do? Allow its costs to increase Work to decrease its costs

What is a natural monopoly?

From the graph you drew to answer Exercise 11.6, would you say this transit system is a natural monopoly? Justify. Use the following information to answer the next three questions. In the years before wireless phones, when telephone technology requited having a wile matting to every home, it seemed plausible that telephone service had diminishing average costs and might require regulation like a natural monopoly. For most of the twentieth century, the national U.S. phone company was AT&T, and the company functioned as a regulated monopoly. Think about the deregulation of the U.S. telecommunications industry that has occurred over the last few decades. (This is not a research assignment, but a thought assignment based on what you have learned in this chapter.)

What is a legal monopoly?