Presentation on theme: "R EGULATION MBA Managerial Economics Lecturer: Jack Wu."— Presentation transcript:
R EGULATION MBA Managerial Economics Lecturer: Jack Wu
R EGULATION natural monopoly potentially competitive market asymmetric information externalities public goods
N ATURAL M ONOPOLY Average cost minimized with single supplier large scale/scope economies relative to market demand
M ARGINAL C OST P RICING Require provider set price equal to marginal cost supply quantity demanded demand marginal cost
A VERAGE C OST P RICING Require provider set price equal to average cost supply quantity demanded demand marginal cost average cost
R ATE OF R ETURN R EGULATION maximum rate of return on rate base disallowed profit returned to users
P OTENTIALLY C OMPETITIVE M ARKET Economies of scale/scope are small relative to market demand technology market demand
MATH EXAMPLE Suppose that the demand for electric power is P=10-q. P represents price in thousand dollars and q represents quantity in megawatt-hours. All generating plants have a capacity of 10 megawatt-hours. Generation involves a fixed cost of $50,000 and a constant marginal cost of $1000 per megawatt- hour. Now, suppose that the demand grows to P=10- 0.05q. How many plants would be needed to meet the quantity demanded?
S TRUCTURAL R EGULATION Bar franchise holder from vertically related markets prevent monopoly from extending market power
M ORAL H AZARD IN M EDICINE supply inflated demand true demand quantity (million hours a mth) price ($/hour) a b
R ESOLVING I NFORMATION A SYMMETRY mandatory disclosure regulation of conduct structural regulation
E MISSIONS marginal cost to society quantity (tons/year) marg. cost/benefit ($/ton) 35 8000 marginal benefit to society
E MISSIONS F EE user fee quantity (tons/year) marg. cost/benefit ($/ton) 35 8000 marginal benefit to society
A CCIDENTS marginal cost to driver quantity (units of care) marg. cost/benefit s marginal benefit to society
P UBLIC G OODS legal framework enables excludability copyright patent trade-off incentive for knowledge creation economically efficient usage of information
P UBLIC P ROVISION For some public goods, practically difficult to enforce exclusion national defense clean air fireworks
C ONGESTIBLE F ACILITIES 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 - 20q, 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=20-0.1q. At a price of $1000 per megawatt hour, what is the minimum number of plants needed to produce the quantity demanded?