The following figure illustrates a situation similar to that of TransCanada, a natural gas distribution company in North America. This society is a natural monopoly which cannot discriminate by prices.
How much TransCanada will produce and what the price of natural gas will be if the company:
a. is not regulated and maximize profit?
b. is subject to regulations which prohibit any economic profit?
c. is subject to regulations targeting allocative efficiency?
Homework Answers
Demand curve:
P = 10 - 2Q
TR = p*Q = 10Q - 2Q2
MR = dTR/dQ = 10 - 4Q
a)
At equilibrium, MR = MC
10 - 4Q = 2
Q* = 2
P* = 10 - (2*2) = 6
b)
In case, of regulation, equilibrium occurs P = Average Cost
So, P = 4 and Q = 3
c)
Allocative efficiency is acheived when Price charged = MC.
Howerver, in case of regulating the natural monopoly, P = AC and not equal to MC.
So, allocative efficiency is not obtained.
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