Session 4 Pricing Strategy Managerial Economics Professor Changqi Wu.
R EGULATION Managerial Economics Lecturer: Jack Wu.
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Transcript of R EGULATION Managerial Economics Lecturer: Jack Wu.
![Page 1: R EGULATION Managerial Economics Lecturer: Jack Wu.](https://reader030.fdocuments.net/reader030/viewer/2022033105/56649cba5503460f949828b5/html5/thumbnails/1.jpg)
REGULATIONManagerial Economics
Lecturer: Jack Wu
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REGULATION
natural monopoly potentially competitive market asymmetric information externalities public goods
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NATURAL MONOPOLY
Average cost minimized with single supplier large scale/scope economies relative to market demand
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MARGINAL COST PRICING
Require provider set price equal to
marginal cost supply quantity
demanded
demand
marginal cost
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AVERAGE COST PRICING
Require provider set price equal to
average cost supply quantity
demanded
demand
marginal cost
average cost
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RATE OF RETURN REGULATION
maximum rate of return on rate base disallowed profit returned to users
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POTENTIALLY COMPETITIVE MARKET
Economies of scale/scope are small relative to market demand technology market demand
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STRUCTURAL REGULATION
Bar franchise holder from vertically related markets
prevent monopoly from extending market power
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MORAL HAZARD IN MEDICINE
supply
inflated demand
true demand
quantity (million hours a mth)
pri
ce (
$/h
our)
a
b
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RESOLVING INFORMATION ASYMMETRY
mandatory disclosure regulation of conduct structural regulation
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EMISSIONS
marginal cost to society
quantity (tons/year)
marg
. co
st/b
enefit
($/t
on)
35
8000
marginal benefit to society
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EMISSIONS FEE
user fee
quantity (tons/year)
marg
. co
st/b
enefit
($/t
on)
35
8000
marginal benefit to society
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ACCIDENTS
marginal cost to driver
quantity (units of care)
marg
. co
st/b
enefit
s
marginal benefit to society
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PUBLIC GOODS
legal framework enables excludability copyright patent
trade-off incentive for knowledge creation economically efficient usage of information
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PUBLIC PROVISION
For some public goods, practically difficult to enforce exclusion national defense clean air fireworks
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CONGESTIBLE FACILITIES
social marginal cost varies with usage resolve through user fee = social marginal
cost time usage
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DISCUSSION QUESTION
The demand for electric power in Sol Province is p = 20 - 20q, where p and q represent the price in thousands of dollars and quantity in Megawatt hours, respectively. Suppose that an electricity plant generates power at a constant marginal cost of $1000 per megawatt hour up to a capacity of 10 megawatt hours. Sol Province requires the plant to implement marginal-cost pricing.
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DISCUSSION QUESTION
Illustrate the price and quantity with marginal cost pricing.
Suppose that demand grows to P=20-0.1q. At a price of $1000 per megawatt hour, what is the minimum number of plants needed to produce the quantity demanded?