Government Intervention with a Monopoly
Ways the Government can Correct Monopolies:
- Anti-Trust Laws - Trying to make the market more competitive. Example: Preventing two big companies like Coke and Pepsi from merging.
- Public Ownership - The government takes ownership of the business Example: In many European countries, the government owns and operates utilities like water, electricity, and postal service.
- Regulation - This could be a way of making monopolies lower their prices. Example: Marginal-Cost Pricing for a natural monopoly
Marginal Cost Pricing
- A natural monopoly (like Walmart) always experiences economies of scale (when ATC is decreasing). This means marginal cost must lie ________ATC.
- The government can force the firm to charge a price that is equal to the marginal cost. In the diagram above this would be at an output of ________
- However, at this output, the ATC is ________ and the price is ________
- Since P < ATC (economic loss) it is usually not sustainable for the business.
Example: Government Intervention
Which of the following is true for a natural monopoly that always experiences economies of scale?
A) marginal cost always lies above ATC
B) marginal cost may lie above or below ATC
C) marginal cost always lies below ATC D) marginal cost is equal to ATC
C
For a natural monopoly like Walmart that always experiences economies of scale the ATC curve must be falling. This means MC must lie below ATC. Remember when MC < ATC it pulls ATC down.