Because their costs are higher, small-scale producers can simply never compete with the larger, lower-cost producer. In this case, the natural monopoly of the single large producer is also the most economically efficient way to produce the good in question.
Q. What problems are caused by natural monopolies?
Natural monopolies are uncontestable and firms have no real competition. Therefore, without government intervention, they could abuse their market power and set higher prices. Therefore, natural monopolies often need government regulation.
Table of Contents
- Q. What problems are caused by natural monopolies?
- Q. Are natural monopolies bad?
- Q. What company is a perfectly competitive market?
- Q. Is the retail gasoline market perfectly competitive?
- Q. What type of market is gasoline?
- Q. At what price should all firms produce at?
- Q. What price will this firm charge to maximize profit?
Q. Are natural monopolies bad?
Monopolies over a particular commodity, market or aspect of production are considered good or economically advisable in cases where free-market competition would be economically inefficient, the price to consumers should be regulated, or high risk and high entry costs inhibit initial investment in a necessary sector.
Q. What company is a perfectly competitive market?
Firms are said to be in perfect competition when the following conditions occur: (1) the industry has many firms and many customers; (2) all firms produce identical products; (3) sellers and buyers have all relevant information to make rational decisions about the product being bought and sold; and (4) firms can enter …
Q. Is the retail gasoline market perfectly competitive?
In general, we find full shifting of gasoline taxes to the final consumer, with changes in gasoline taxes fully reflected in the tax-inclusive gasoline price almost instantly, a result consistent with a retail gasoline market in which firms are perfectly competitive and produce at constant cost.
Q. What type of market is gasoline?
Within a given geographic market, the market structure of gasoline retailing has been “described as a differentiated chain oligopoly” (Scherer, 1996, 124).
Q. At what price should all firms produce at?
In order to maximize profit, the firm should produce where its marginal revenue and marginal cost are equal. The firm’s marginal cost of production is $20 for each unit. When the firm produces 4 units, its marginal revenue is $20. Thus, the firm should produce 4 units of output.
Q. What price will this firm charge to maximize profit?
To maximize profits, the firm should set marginal revenue equal to marginal cost. Given the fact that this firm is operating in a competitive market, the market price it faces is equal to marginal revenue. Thus, the firm should set the market price equal to marginal cost to maximize its profits: 9 = 3 + 2q, or q = 3.
