Answer to Question #274131 in Microeconomics for Mongovve

Question

Many governments directly regulate monopolies, especially those created by the government, such as public utilities (for example, water, natural gas, or electricity distribution), to reduce monopolies' mar ket power. If the marginal cost of production for a monopoly is constant, there are no fixed costs and the market demand curve is linear, draw a graph indicating the socially optimal amount of regulation. Now suppose the government sets a price ceiling that is above the socially optimal level, but below the monopoly's profit-maximizing price. How do the price, quantity, and welfare under this regulation compare to those under optimal regulation?

Answer 1

Solution:

The graph indicating the socially optimal amount of regulation is as below:

 

The price under this regulation will be higher compared to those under optimal regulation. The quantity will increase compared to those under optimal regulation. The welfare under this regulation will decrease and the monopoly will make zero economic profit as a result.