Question

Explain and diagrammatically represent the difference between profit regulation and out put regulation of a natural monopoly

Answer 1

Answer:-

Natural monopoly exists where average costs tends to fall over wider range of output if single firm exists in market.

i) Price regulation: government regulates price by either setting it equal to average cost or marginal cost of production. it is called average cost pricing or marginal cost pricing respectively.

ii) Profit Regulation: Natural monopolist firm can misuse its power to set price which is above the cost of production .Hence, govenrment can set price which is equal to average cost. here, firm shall be getting only normal profit.

ii) Output regulation: Perfectly competitive output level is regarded as benchmark, hence government may force monopoly to produce output where P = MC.