Answer to Question #59197 in Microeconomics for Albert

Question

Grandpa wants to renew his auto insurance. Let us suppose he can buy either a natural monopoly (no-fault) one or an oligopoly (liability). As a student in big business economics,
(a) What are four basic differences on pricing, risk, and premium
(b) Which one is better on:
- Efficiency ground and
- Equity ground

Answer 1

If Grandpa can buy either a natural monopoly one or an oligopoly, then:
(a) In case of monopoly he can set the price he want, there is almost no risk and the profits are the highest possible, if he produces profit-maximizing quantity. In case of oligopoly he can't set the price that he want, the risk is higher and the ability of receiving profits depends on his and his competitors price strategies.
(b) Efficiency ground is better then equity ground.