module 77 Public Policy to Promote Competition 759
Section 14 Market Failure and the Role of Government
- The FYI in this module discusses the possibility that regulators
set prices for wind energy on the basis of average total cost.
Explain why policymakers who don’t want to pay subsidies
would choose average cost pricing over marginal cost
pricing in the market for wind energy.
Tackle the Test: Multiple-Choice Questions
- The Sherman Antitrust Act of 1890 sought to do which of the
following?
a. break up existing monopolies
b. prevent the creation of new monopolies
c. stop monopoly behavior engaged in by trusts
d. respond to the increasing power of trusts in the economy
e. all of the above - A natural monopoly exists when, over the relevant range,
increasing the output level results in a lower
a. total cost.
b. average total cost.
c. average variable cost.
d. average fixed cost.
e. marginal cost. - Which of the following is the most common policy approach to
a natural monopoly?
a. public ownership
b. price regulation
c. quantity regulation
d. quality regulation
e. a breakup of the monopoly into smaller firms
For questions 4 and 5, refer to the graph provided.
- Without government intervention, a monopolist will
produce and charge.
a. Q 3 ,P 3
b.Q 2 ,P 4
c. Q 2 ,P 1
d.Q 1 ,P 3
e. Q 1 ,P 2 - The lowest regulated price the government could expect this
monopolist to maintain in the long run is
a. P 1.
b.P 2.
c. P 3.
d.P 4.
e. P 5.
ATC
MR D
MC
P 1
P 2
P 3
P 4
P 5
Q 1 Q 2 Q 3 Q 4 Quantity
Price,
cost per
unit
Tackle the Test: Free-Response Questions
- a. Draw a correctly labeled graph showing a natural monopoly.
On your graph, label the price and quantity the monopoly
will choose if unregulated as PUand QU.
b. On the same graph, shade in and label consumer surplus
and the firm’s profit in the absence of regulation.
c. On the same graph, label the lowest price that regulators
could expect the monopoly to maintain in the long run as
PRand the resulting quantity as QR.
d. What happens to the size of consumer surplus when the
firm is required to charge PRrather than PU? What happens
to the firm’s profit?