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natural monopolies and public utility

Public utilities such as electricity are referred to as natural monopolies and are often subject to regulation by a state authority (the "public Regulatory Commission").
a) Explain why a public utility such as electricity is referred to as a "natural monopoly."
b) Explain how and why an average cost pricing policy is applied to public utility.
c) Discuss how the policy affects the utility's profits and costs.
d) Discuss the effects of the policy on the efficiency of the utility.

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These are called natural monopolies because (1) it is efficient for only one producer to exist - that is, society would not benefit from competition and (2) the monopoly occurs because the structure of the industry is such that a single firm will always exist in the long run - even if no firms employ anti-competitive practices. Like you said, the major example is usually electricity or other public utilities.


Average cost pricing is used so that the monopoly - even if it is a "natural" monopoly - is ...

Solution Summary

This job clearly examines natural monopolies.