Question

Class, we know that a monopoly is not economically efficient because it does not yield productive efficiency P=ATC or allocative efficiency P=MC. Instead P>MC and exceeds ATC at its minimum resulting in an under-allocation of resources. Government tries to correct for this under-allocation by establishing a legal (ceiling) price where P=MC.

Do price regulations produce the desired result of efficiency? Provide an example

Answer 1

Yes, price regulations produce desired result. When government establish price ceiling P= MC ,then there will be allocative efficiency in the market . But productive efficiency may be or my be not in the market in short run . But in long run producer have a lot of time to redistribute and using new technology to reduce cost ,so in long run it produces at minimum cost to maximize profit.firm profit maximization converted into cost minimization to increase its profit because it lost its power to control price ,now only way to increase its profit firm do cost minimization.

Yes regulations produce desired results in long run.