1. Learning Objectives: Monopoly LO5: Explain three grounds on which monopolies can be defended LO6: Discuss ways that governments can change the behaviour of monopolies CHAPTER 10 10-1© 2012 McGraw-Hill Ryerson Limited

2. Some options: Taxing the monopolist Government price setting Nationalization 10-2© 2012 McGraw-Hill Ryerson Limited LO6 Government Control

3. Lump sum Profits Tax: affects fixed cost but not variable cost increases average cost but marginal cost is unaffected output and price levels are unaffected lower profit (due to higher costs) 10-3© 2012 McGraw-Hill Ryerson Limited LO6 Taxing the Monopolist

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5. Monopoly Sales Tax: tax on each unit sold increases marginal cost profit maximizing point shifts part of the tax is shifted to consumer in the form of higher price lower quantity is produced monopolist’s profit is reduced 10-5© 2012 McGraw-Hill Ryerson Limited LO6 Taxing the Monopolist

6. © 2012 McGraw-Hill Ryerson Limited LO6 10-6

7. Socially Optimum Price the price that produces the best allocation of products (and therefore resources) from society’s point of view, that is, P  MC Fair-Return Price a price that guarantees that the firm will earn normal profits only, that is, where P  AC 10-7© 2012 McGraw-Hill Ryerson Limited LO6 Government Price Setting

8. © 2012 McGraw-Hill Ryerson Limited LO6 10-8

9. Self-Test 10-9© 2012 McGraw-Hill Ryerson Limited On the graph, indicate: a) Price (P UM ) and quantity (Q UM ) if monopolist is unregulated b) Price (P SO ) and quantity (Q SO ) if monopolist charges the socially optimum price c) Price (P FR ) and quantity (Q FR ) if monopolist charges fair-return price LO6