Th3.6: Natural Monopolies

Question 1

It is argued that if the industry is likely to end up as a monopoly it is better…

Answer 1

for the consumer if that monopoly is controlled by the government, who will maximise welfare

Question 2

Refer to PP
Look at Graph 47. Where will the firm produce if it is private and decides to profit maximise?

Answer 2

where MC = MR and therefore producing at P1Q1 and make supernormal profit of the orange area

Question 3

Refer to PP
Look at Graph 47. However, if it was nationalised the firm would instead…

Answer 3

aim to maximise welfare and so would produce where AR = MC, the allocative efficient output - this means they produce at Q2P2 and would make a loss of the purple area

Question 4

What does nationalisation lead to?

Answer 4

leads to higher output at lower prices but causes a loss for the industry, which the government would need to cover