What three types of government policies are used to alter or control firm behavior?
Determine which type of regulation is used for each of the following:
a. Preventing a merger that the government believes would lessen competition
b. The activities of the Food and Drug Administration
c. Regulation of fares charged by a municipal bus company
d. Occupational safety and health regulations that affect working conditions
(Regulating Natural Monopolies) The following graph represents a natural monopoly.
a. Why is this firm considered a natural monopoly?
b. If the firm is unregulated, what price and output would maximize its profit? What would be its profit or loss?
c. If a regulatory commission establishes a price with the goal of achieving allocative efficiency, what would be the price and output? What would be the
firm's profit or loss?
d. If a regulatory commission establishes a price with the goal of allowing the firm a "fair return," what would be the price and output? What would be the
firm's profit or loss?
e. Which one of the prices in parts b, c, and d maximizes consumer surplus? What problem, if any, occurs at this price