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What are the two approaches to regulating a monopoly? name them, show the diagram, and discuss...

  1. What are the two approaches to regulating a monopoly? name them, show the diagram, and discuss the dilemma (the natural monopoly case with a flat MC).
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Answer #1

The natural monopoly occurs when the rise in the production leads to fall in the average cost of production over the wide range of output.

Further, the unregulated market might underproduce incredibly here. Thus, the goverment would go for the regulations. Following are the two regulatory actions:

  • Average cost pricing : here the government forces the firm to produce where the P=MC.
  • Marginal cost pricing : here output must correspond to the P=MC.

Here government has to subsidy the production to avoid the losses to producer.

Following is the diagram:

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