What are the reasons that are usually given to justify regulation?
What will be an ideal response?
Following are the reasons offered to regulate an industry:
| 1. | The industry may be characterized by economies of scale and/or scope. If so, there are cost advantages to having a single firm produce the entire industry output. However, such a monopoly might abuse its position and charge high prices. To obtain the cost advantages without the price disadvantages, regulation may be proposed. |
| 2. | A particular good or service may be seen as essential, and universal service for all may become an objective. In order to provide service to all at a uniformly low cost, a firm will need to cross-subsidize-charge prices that are above or below the actual cost of service. Such a firm is vulnerable to new entry, which seeks to “cream skim” where prices are higher. Therefore, part of regulation in such industries includes limit or prevention of entry. |
| 3. | For some industries there may be self-destructive competition. This can occur if there are large economies of scale with high fixed investment as in the case of railroads. Rate wars that push prices down to cover only marginal costs result in long-run destruction of the industry unless regulation of rates prevents it. |
| 4. | Consumers may be misinformed or cheated by firms, or there may be environmental damage from some firms. This is not a justification for price or rate-of-return regulation, however. |
Economics
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The Lawn Ranger, a landscaping company, has total costs of $4,000 and total variable costs of $1,000. The Lawn Ranger's total fixed costs are
A) $0. B) $3,000. C) $5,000. D) indeterminate because the firm's output level is not known.
Economics