16.5 Monopoly Regulation

MyEconLab Concept Video

Natural monopoly presents a dilemma. With economies of scale, a natural monop­oly produces at the lowest possible cost. But with market power, the monopoly has an incentive to raise the price above the competitive price and produce too little—to operate in the self-interest of the monopoly and not in the social interest.

Regulation—rules administered by a government agency to influence prices, quantities, entry, and other aspects of economic activity in a firm or industry—is a possible solution to this dilemma.

To implement regulation, ...

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