Financial University under the Government of the Russian Federation Moscow 2014. - презентация

1 Financial University under the Government of the Russian Federation Moscow 2014

2 * Monopoly * Natural monopoly * Economics of scale and natural monolies * AC and MC pricing * Intervention * Subnormal profits

3 high barriers to entry economies of scale

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6 Factors of economies of scale: * high fixed costs * costs involved in setting up the business * low marginal costs

7 Aim of the natural monopolist to maximise profits Profit max level MC=MR Not gain the potential economies of scale A loss of allocative efficiency

8 Two types: * Public ownership * Regulations

9 * Nationalisation * Under public ownership the government could operate the monopoly At an allocatively efficient level of output Charge a price equal to marginal cost Cover any losses out of tax revenues

10 * 1930s- * 1930s-nationaling of New Zealand firms * Government strategic businesses * Example: * Example: NZ rail, postal services, telecommunications, broadcasting, electrical power and many other services have been run by the state. * 1980s-1990s- * 1980s-1990s- deregulation of monopolies State Owned Enterprises Privatisation

11 * A private owned natural monopoly can be regulated to produce at a more socially desirable level of output in order to increase allocative efficiency. * Setting levels of regulatory pricing * Marginal cost pricing ( where price =MC) * Average cost pricing (where price = AC in order to provide a normal profit )

12 * This is where allocative efficiency will be achieved. Output (millions) Revenue and costs MR AR MC AC Ppm Pmc QpmQmc

13 Output (millions) Revenue and costs MR AR MC AC Qac Pac DWL

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16 To make sure the business continues operating in the long run, this subnormal profit can be paid for in two ways: 1. Amount of loss can be matched by a subsidy payment from the government 2. The monopolist could charge a two part tariff

17 Examples of natural monopolies Economies of scale can lead to natural monopolies Natural monopolies may or may not operate for the good of society Natural monopolies can be influenced by the use of subsidies, regulations or public ownership

18 Stigler G. The Theory of Economic Regulation // Bell Journal of Economics and Management Science. Vol. 2 (1971). P. 3. Amacher R., Higgins R., Shughart II W., Tollison R. The Behavior of Regulatory Activity Over the Business Cycle: An Empirical Test // Economic Inquiry P Wikipedia.org