ECON 102 Final Exam

Terms in this set (34)

i. Marginal Cost Pricing - requiring the firm to set price equal to marginal cost at the level of output produced
a. Pros - allocative efficiency (P=MC)
b. Cons - firm must be subsidized, no incentive to keep costs low or upgrade its infrastructure
ii. Average Cost Pricing - requiring the firm to set price equal to average cost at the level of output produced
a. Pros - the firm can cover its costs
b. Cons - P>MC, no cost-lowering incentives
iii. Regulating a Natural Monopoly with low constant MC and decreasing ATC
iv. Two-part tariff - occurs when a consumer has to pay for the good twice: once for access and again for the marginal usage fee
a. Pros - the firm can cover its costs, allocative efficiency (P=MC)
b. Cons - it's difficult to estimate the number of consumers in the market and the entry fee, together
v. Rate of Return Regulation - allows a monopolist to earn a "fair" return on his investment and provide adequate service to consumers
a. Pros - the firms earns profit and can innovate and improve
b. Cons - varying definition of "fair" (sorting legitimate and illegitimate costs)
vi. Price Caps - a simple price ceiling on the final output
a. Pros - firm truly has an incentive to keep costs low
b. Cons - quality may decrease, if the firm does "too well," people will get upset
vii. Profit Sharing - a firm can make a certain level of return, put all other profits must be shared with the regulator
a. Pros - the firm has an incentive to keep costs low to keep profits
b. Cons - firm behavior may change when near the "cutoff" (gold-plating - taking would-be profits and turning them into "costs" so the firm doesn't have to share with the regulator
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