Chapter 9

The Theory of Decreasing Cost Production


Chapter 9 analyzes decreasing cost services (natural monopolies), in which the average cost curve of an individual firm declines all the way to the market demand curve. The chapter develops the optimal pricing and investment rules, with the latter distinguishing between the easy case (a profit-maximizing monopolist can at least break even) and the hard case (a profit-maximizing monopolist incurs a loss). Among the topics covered are the public's desire to minimize the deficit in the hard case and the need to distinguish between nonexclusive goods and decreasing cost services with zero marginal costs, even though both exhibit nonrivalry in consumption.


Compensated demand curve; Decreasing ...

Get Public Finance, 3rd Edition now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.