Regulating Monopolies (Socially Optimal and Fair Return)- Micro Topic 6.4

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“I doing this mr. Flibble ac. Dc econ key economic concepts in 60 seconds. Today today i want to talk about how you regulate a monopoly.

This right here is natural monopoly. We re going to talk about unregulated being leave it alone. We re gonna talk about socially up. While we re talking about something called fair return those are the concepts.

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I m going to show you those concepts. I m also going to show you what you never tax the monopoly your temper bango my not with baton attacks it attacks me monopoly is bad i m going to show you the reason why i m going to show you exactly 60 seconds. The first concept let s talk about unregulated unregulated means monopoly is left to its own devices on where s can produce it s kind of reduced. We re at michael s mc price up here and over you can see price for monopoly and quantity.

Monopoly. When is completely unregulated well the government comes and they try to set up a price ceiling. A cap on the price they can do it two different places. They can do it socially optimal or fair return all right first one let s do social alf.

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Let s say they say they want the quantitative society ones. Where it is where marginal cost hits this demand basically right here. Where the supply is and this is where perfect competition was bruised. And the government would come in and set up a price right here which we re going to call socially optimal price boom and that would give you the quantity that s socially optimal.

But there s a problem with that just look if they do that we re going to have a huge loss right. The firm is going to produce there the apc is going to be hired and now the government has to come in and subsidize them instead of doing that they can do it at fair return fair return would be right here when atc hits the demand curve. This is a price ceiling. That was called fair return fair return which result in that quantity basically means that she s always fought in the whole graph the total revenue equals.

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The total cost right they break even right if they were bruising here the bruising profit here a profit here they re producing breakeven here with a loss only spot in the whole place. That s why it s called fair return okay. This is unregulated fair return socially optional right and done till next time time for a bonus round. What you take a look at it you re tempted ever so tempted say hey let s put a per unit tax monopoly to force them to do what we wanted to do it s works right a monopoly take a look the price is higher than socially optimal here s what society wants monopolies charging higher price and the producing a quantity that s even less right here s what i m producing for monopoly society.

Wants that amount produced if you tax them it s going to make it worse. How do i know let s take a look. Let s say you set a per unit tax green attacks that shifts the marginal cost curve up shifts it up and now it s over here to atc with shift as well. But i m not going to add that because i would get too messy.

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If they do that we ll take a look the new marginal cost. It s marginal revenue here so now this is a quantity for a monopoly with the tax and this would be the price they charge well that makes it works prices even higher than before quite as it unless. We ve made the situation even worse. So you don t catch monopoly until ” .

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