To restrict a firm's monopoly power, why can't antitrust authorities just set a floor or a ceiling in the market?
What will be an ideal response?
It is difficult to set a fair price in a monopolized market. Antitrust authorities can either set a price in the market that is equal to marginal cost or can require firms to set a price that is equal to average cost. The price set at marginal cost is called the efficient price or the socially-optimal price. While this is the price at which social surplus is maximized, in a natural monopoly, marginal cost is lower than average total cost at every quantity. So, at this price, the firm will experience an economic loss and will eventually exit the industry. Alternatively, the government could require firms to set the price at average total cost. This would allow the monopolist to stay in business as the firm would not incur losses. However, both these forms of price regulation would mean that the firm has no incentive to minimize costs or to innovate and produce new goods and services.
You might also like to view...
The difference between zero accounting profit and zero economic profit is that
a. an economic profit of zero indicates a fair rate of return because it includes opportunity cost. opportunity cost and b. an economic profit of zero indicates an unacceptable rate of return because it does not include opportunity cost. c. an economic profit of zero indicates more than a fair rate of return because it includes opportunity cost and explicit cost.. d. an accounting profit of zero indicates a fair rate of return because it includes opportunity cost.
At the profit-maximizing quantity of output for a monopolist, average revenue, marginal revenue, and price are all equal
a. True b. False Indicate whether the statement is true or false