CFA II: SS4 - Regulation and Anti-Trust
Terms in this set (7)
Occur when a single firm has the capacity to produce all of an industry's output at the lowest per-unit costs. Arises mainly in industries where economies of large-scale production prevail (utilities). A profit maximizing monopolist will produce the quantity for which Marginal Revenue = Marginal Cost.
Refers to government regulation of specific industries, i.e. utilities, insurance, banking. Argument for is that social welfare is inreased by regulation.
One form of natural monopoly regulation, it can take the form of marginal cost of average cost pricing. Regulators may impose a price = to marginal cost in order to achieve the optimal production quantity. In this instance though the Price is < ATC which means the monopolist could only continue to produce if they were paid a subsidy. Therefore the alternative of average cost pricing is often used.
The regulator set the price so that a competitive rate of return is earned by the monopolist company.
Is concerned with product quality and market failures other than those from monopolies. Think about the SEC, FAA, or FRB. The rational is to protect consumers because they have limited access to information necessary to judge product quality.
Based on the assumption that, regardless of the orginal purpose behind its establishment, a regulatory body will, at some point in time, be influenced or even possibly controlled by the industry that is being regulated.
Share the Gains, Share the Pains
A theory based upon the assumption that regulators will strive to satisfy all three interested parites: legislators, customers, and regulated firms