Mar 04 2013

Monopoly prices – to regulate or not to regulate, that is the question!

Competitively Priced Electricity Costs More, Studies Show – New York Times

The problem with monopolies, as our AP students have learned, is that a monopolistic firm, left to its own accord, will most likely choose to produce at an output level that is much lower and provide their product at a price that is much higher than would result from a purely competitive industry.Regulated Monopoly A monopolist will produce where its price is greater than its marginal cost, indicating an under-allocation of resources towards the product. By restricting output and raising its price, the monopolist is assured maximum profits, but at the cost to society of less overall consumer surplus or welfare.

Unfortunately, in some industries, because of the wide range of output over which economies of scale are experienced, it sometimes makes the most sense for only one firm to participate. Such markets are called “natural monopolies” and some examples are cable television, utilities, natural gas, and other industries that have large economies of scale. (click graph to see full-sized)

Government regulators face a dilemma in dealing with natural monopolistic industries such as the electricity industry. A electricity company with a monopoly in a particular market will base its price and output decision on the profit maximization rule that all unregulated firms will; they’ll produce at the level where their marginal revenue is equal to their marginal cost. The problem is, for a monopolist its marginal revenue is less than the price it has to charge, which means that at the profit maximizing level of output (where MR=MC), marginal cost will be less than price: evidence of allocative inefficiency (i.e. not enough electricity will be produced and the price will be too high for some consumers to afford).

Here arises the need for government regulation. A government concerned with getting the right amount of electricity to the right number of people (allocative efficiency) may choose to set a price ceiling for electricity at the level where the price equals the firm’s marginal cost. This, however, will likely be below the firm’s average total cost (remember, ATC declines over a WIDE RANGE of output), a scenario which would result in losses for the firm, and may lead it to shut down altogether. So what most governments have done in the past is set a price ceiling where the price is equal to the firm’s average total cost, meaning the firm will “break even”, earning only a “normal profit”; essentially just enough to keep the firm in business; this is known as the “fair-return price”.

Below AP Economics teacher Jacob Clifford illustrates and explains this regulatory dilemma. Watch the video and see how he shows the effect of the two price control options on the firm’s output and the price in the market.

[youtube]http://www.youtube.com/watch?v=A2ePDt6-k8Q[/youtube]

The article above examines the differences in the price of electricity in states which regulate their electricity prices and states that have adopted “market” or unregulated pricing, in which firms are free to produce at the MR=MC level:

“The difference in prices charged to industrial companies in market states compared with those in regulated ones nearly tripled from 1999 to last July, according to the analysis of Energy Department data by Marilyn Showalter, who runs Power in the Public Interest, a group that favors traditional rate regulation.

The price spread grew from 1.09 cents per kilowatt-hour to 3.09 cents, her analysis showed. It also showed that in 2006 alone industrial customers paid $7.2 billion more for electricity in market states than if they had paid the average prices in regulated states.”

The idea of deregulation of electricity markets was that removing price ceilings would lead to greater economic profits for the firms, which would subsequently attract new firms into the market. More competitive markets should then drive prices down towards the socially-optimal price, benefiting consumers and producers by forcing them to be more productively efficient in order to compete (remember “Economic Darwinism”?). It appears, however, that higher prices have not, as hoped, led to lower prices:

“Since 1999, prices for industrial customers in deregulated states have risen from 18 percent above the national average to 37 percent above,” said Mrs. Showalter, an energy lawyer and former Washington State utility regulator.

In regulated states, prices fell from 7 percent below the national average to 12 percent below, she calculated…

In market states, electricity customers of all kinds, from homeowners to electricity-hungry aluminum plants, pay $48 billion more each year for power than they would have paid in states with the traditional system of government boards setting electric rates…”

That $48 billion represents higher costs of production for other firms that require large inputs of energy in their own production, higher electricity bills for cash-strapped households, and greater profits and shareholder dividends for the powerful firms that provide the power. On the bright side, higher prices for electricity should lead to more careful and conservative use of power, reducing Americans’ impact on global warming (since the vast majority of the country’s power is generated using fossil fuels).

Here arises another question? Should we be opposed to higher profits for powerful electricity firms if their profits result in much needed energy conservation and a reduction in greenhouse gas emissions? An environmental economist might argue that if customers are to pay higher prices for their energy, it might as well be in the form of a carbon tax, which rather than increasing profits for a monopolistic firm would generate revenue for the government. In theory tax revenue could be used to subsidize or otherwise promote the development and use of “green energies”.

Whether customers paying higher prices for traditionally under-priced electricity is a good or bad thing depends on your views of conservation. But whether higher profits for a powerful electricity company are more desirable than increased tax revenue for the government are beneficial for society or not seems clear. If we’re paying higher prices, the resulting revenue is more likely to be put towards socially desirable uses if it’s in the government’s hands rather than in the pockets of shareholders of fossil fuel burning electricity monopolies.

Discussion Questions:

  1. Why do governments regulate the prices in industries such as natural gas and electricity?
  2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
  3. Why, in reality, did the price of electricity in unregulated electricity markets ultimately increase so much that consumers in the market states paid billions of dollars more than in regulated states?
  4. What industries besides that for electricity share characteristics that might qualify them as “natural monopolies”? Which of the industries you identified should be regulated by government, and WHY?

230 responses so far

230 Responses to “Monopoly prices – to regulate or not to regulate, that is the question!”

  1. Charlie.Gaoon 11 Nov 2007 at 6:41 pm

    I believe that all monopolies except natural monopolies should be regulated by the government to some extent. Let's face it, no one wants to get ripped off by monopolies who are charging outrageous prices for their product. It is never wise to regulate a natural monopoly because it is most effective if a firm has a natural monopoly and if there is a price ceiling, it will hurt both the firm and society as well because there are no other substitutes for that natural monopoly and it is not efficient for other companies to produce the same product.

  2. Helenon 12 Nov 2007 at 9:18 pm

    Governments regulate the prices in industries such as natural gas and electricity because these natural monopolies result in allocative inefficiencies. Since these monopolies, like any other firms, seek to maximize profits, they will produce at a level were MR = MC. But because a monopoly’s MR is less than price, the MC at that level will be less than price, which means allocative inefficiency, or that consumers are demanding more than what is actually produced. In other words, an underallocation of resources will occur in the monopoly, as the monopolist will limit its supply to keep its price at the profit-maximizing level, and there will be a loss in consumer surplus, as the price will be too high for some consumers. Therefore, the government steps in to set a price ceiling where the price equals to the marginal cost, thus resulting in allocative efficiency. But because this price is usually below the monopolist’s ATC, the government resorts to the alternative of setting the price ceiling where price equals to the firm’s ATC, or the “fair-return price”, where the monopolist will earn a normal profit.

    De-regulation of the electricity industry might eventually result in lower prices in the long-run because the removal of price ceilings would lead to greater economic profits, thus attracting new firms into the industry. Increased competition would then force greater productive efficiency from the firms in the industry, who with lower costs, can sell their product/service at a lower price than its competitors, thus driving the price down closer to the price where allocative efficiency is achieved.

  3. KatherineYangon 12 Nov 2007 at 9:32 pm

    Monopolies are not allocatively or productively efficient, meaning, they are market failures. Which is why governments set price ceilings inorder to insure efficiency and prevent market failure. This also prevents the monololist from setting so high a price, some consumers cannot or are not willing to pay.

    If governments deregulate electricity, the idea is that the high profits earned would attract new firms which would increase competition, and consequently, drive prices down. This would ensure productive and allocative efficiency which is good for the market.

  4. Michael Dailyon 12 Nov 2007 at 9:49 pm

    Well, first of all natural gas and electricity are primarily considered by most people to be inelastic goods. Even if natural gas and electricity are expensive, consumers will still buy them because they are important to have. I mean I'm pretty sure that if the price of electricity was a huge rip off, my parents would still pay for it because we need lights to see at night time and power for computers to do work. Therefore, government regulates the electricity and natural gas industries, since they would otherwise be able to charge ridiculous prices and still make a hefty profit.

    In contrast, however, deregulation would allow consumers to get sick of the high prices and begin to look for alternatives. This would, therefore, open up more competition. In the end, the monopoly would either have to significantly cut down its prices, or new firms entering the industry would be able to steal consumers. However, entry into an industry with a monopoly is very difficult and that could be an explanation as to why prices of electricity have only risen.

  5. yunqimokon 12 Nov 2007 at 10:04 pm

    Contrary to the general thought that government intervention in economics actually harms the economy, regulations for a monopoly actually benefits society. The price ceiling at P=MC allows for greater allocative efficiency, and also increases total surplus, and removes deadweight loss. Utilities such as water and electricity are basically inelastic, and it is completely unfair for these natural monopolies to simply charge whatever they want. Governments still act in the interests of the people, and thus regulating some monopolies serve that very just purpose.

  6. Angel Liuon 13 Nov 2007 at 9:31 pm

    All natural monopoly need government regulation to control a monopoly from manipulating people's inelastic needs for utility service. But recently, state governments have been de-regulating monopolies, believing that increased competition would force firms to more productively efficient; however, the governments neglect the higher ATC when a natural monopoly dissolves into several smaller firms.

  7. Alice Suon 13 Nov 2007 at 11:00 pm

    1. Governments regulate the prices in industries such as natural gas and electricity because these industries are natural monopolies. The nature of these markets, in which great economies of scale are extended over a wide range of output, leads to a natural monopoly in which the single producer who controls the entire industry is apt to set profit-maximizing price and output. However, at the monopolist's profit-maximizing price and output, P doesn't equal MC, and so resources are underallocated; this is why governments might regulate the prices in such industries- in order to try to push the industry into better allocative and productive efficiency.

    2. A state government would think that de-regulation of the electricity industry might eventually result in lower prices in the long run because of the theory that de-regulation would leave the electricity firms free to set high prices and earn more profit. This profit would attract new firms into the market, creating more competition and thus driving the prices downwards. In reality, however, this theory has been proven wrong as the economies of scale in this naturally monopolistic market have led to increased costs as new firms attempt to enter the market, only driving prices higher than ever before.

  8. kevinyehon 13 Nov 2007 at 11:52 pm

    It's clear that the reason why the deregulation of the industry did not attract many other firms into the industry is because of high barriers to entry, mostly caused by economies of scale. Obviously, many firms would be attracted to the lucrative profits which a pure monopolist is receiving, but since the production of electricity is so costly, it would be extremely difficult for new firms to compete with the currently monopolistic firm, thus there was no drive down of price. This is the reason why governments regulate natural monopolies in the first place. If firms could so easily enter the industry, then there would be no need for regulation since the natural state of things would be for equilibrium to be restored through an influx of producers. Therefore there should be less regulation of competitive industries, but natural monopolies should certainly be regulated

  9. judychenon 14 Nov 2007 at 12:40 am

    1.Governments regulate the prices in industries such as natural gas and electricity because set a price ceiling where the price is equal to the firm’s average total cost, meaning the firms would be earning only a normal profit; just enough to keep the firm in business instead of charging high price to earn high profits.

    2.A state government thinks that de-regulation of the electricity industry might eventually result in lower prices in the long-run because if the price is too high, less people would be willing to buy it; therefore, less profits would earned. In order to maximize profits, firms needs to lower price eventually.

  10. kxc.024on 14 Nov 2007 at 9:32 pm

    Governments regulate monopolies that are crucial to everyday life (such as electricity and water) so that more consumers are able to obtain these goods. The companies that governments usually regulate are the firms that produce necessities, so the government needs to make sure that the lower-income families are also able to pay for these non-luxurious goods. If they were merely luxuries, then the government has no reason to regulate its price.

    Even though in the long-run, this deregulation may lower the prices of these goods, this will take a long time since these monopolies have reached such a large economies of scale. It will be years (maybe even decades) until it's possible. Therefore, during these years while other companies are trying to build up its size to compete, the consumers are going to be suffering.

    But another way to look at it is that it's a small price to pay for lower prices in the future.

  11. MichaelChowon 15 Nov 2007 at 7:10 pm

    1. Governments regulate the prices in industries such as the natural gas and electricity because the two are natural monopolies. And also the two industries listed are necessities to everyday life. As we discussed in class the other day, by regulating the price, governments can help the lower income families by providing accessible necessities.

    2. Deregulation of the electricity industry might eventually result in lower prices in the long-run because it would let other companies have no restriction in setting higher prices to make more profits. In time consumers are only going to look for other alternatives.

  12. Taka Onoon 15 Nov 2007 at 8:21 pm

    1.Prices would be regulated by the government in order for Natural Monopolies to become allocatively efficient. By looking at the graph above, all profit maximizing firms will produce where Marginal Revenue will equal Marginal costs. The problem producing at that point is that the firm is allocatively inefficient where price does not equal marginal costs. Therefore, governments will try to regulate the price of such firms so that those firms will achieve P=MC or allocative efficiency.

    2.The government believes that deregulating prices for those industries will eventually drive prices down because of increasing profits for the industry. With increasing profits, other firms will be attracted to the sweet, delicious smell of "profit pie" thus creating competition within that industry. With increasing competition, prices will be driven down to the socially optimal price thus achieving what the government wanted in the first place.

  13. optional.xuon 15 Nov 2007 at 10:44 pm

    They must reach allocatively efficient areas. The government needs to have these necessities being produced at the right amount so that there won't be shortages for something as crucial as electricity for people.

    De-regulating the industry might cause other firms to come in and COMPETE with the established ones. However, this is not the case because of ECONOMIES OF SCALE. Natural monopolies are better because they are generally more efficient and cost less than if a competing firm was to enter and cause ATC to be higher for both.

  14. ElaineLungon 17 Nov 2007 at 1:57 am

    1. Natural gas and electricity are natural monopolies, meaning they have extended economies of scale. Since they're profit-maximizing, they tend to produce at a quantity where MC=MR; this is a lower quantity and higher price than would make it allocatively or productively efficient, and resources are underallocated. Governments would thus try to control the monopoly by setting a price ceiling in an attempt to produce greater efficiency. However, this usually doesn't work either, as the socially-optimal (or allocatively efficient) output and price where P=MC often falls below the minimum ATC, causing the monopoly to operate at a loss and eventually shut down. The compromise is the fair returns point, at which P=ATC, so the firm is at least making a normal profit and is more efficient than at the profit max point.

    2. Deregulation, in theory, allows monopolists to set higher prices and earn an economic profit, thereby attracting more firms into the industry and driving down the prices in the long-run. However, the nature of such natural monopolies prevents this from actually happening; the great economies of scale make it difficult for new firms to enter into the market, and would result in overall inefficiency.

    A bit tangential, but is it that bad that gas prices are so high? Maybe it'll finally push some people towards alt. energy sources..

  15. jenniferchoion 18 Nov 2007 at 10:14 pm

    Governments regulate the prices in such industries because they are necessities and therefore their prices should be low enough for everyone to have an access. So government can help lower income families to purchase those good by regulating the industries.

    Because de-regulation will mean that the price of electricities will be really high, earning firms in that industry profit, and therefore will attract new firms to enter the industry. And profit brings down the price. But in the case of such natural monopolies, since it is hard for new firms to enter the industry, the price will remain high and the overall efficiency will drop.

  16. Hansen Guon 19 Nov 2007 at 4:28 am

    The thing with natural monopolies is that most of them are bare necessities. From the people living on government aid to the millionaires, we need these utilities, thus it is the government's role to make it affordable to everyone. For other monopolies such as De Beers' Diamonds, it is more of a luxury good and is not necessary for our survival. Thus keeping these unregulated is not as big of an issue as the utilities.

    As for de-regulation, the consumer will suffer for the period of transition until a new firm steps in to challenge/compete with the existing monopoly. However, even after deregulation it may be too difficult for other firms to enter and gain market power. The original monopoly is already so vast and branched out that the new firm may not have enough money for the overhead costs.

  17. Sunny Kimon 19 Nov 2007 at 11:49 am

    Governments regulate the prices in industries such as natural gas and electricity because those products are necessities. Every human beings need those products to carry on their lives. Since people know that without those products they will not be able to survive, they will pay to purchase those products even if they are sold at extremely high price. Therefore, government should restrict the firms who always try to make the most profit.

    However, some state government thinks that de-regulation of the electricity industry might eventually result in lower prices in the long-run because at first the de-regulation gives high profits to the firm but eventually more firms will be interested in this market and join in. If more companies join in, the firms will compete each other and the price will eventually drop. However, this is only in a long run, at least more than 3 years.

  18. Margaret Liuon 19 Nov 2007 at 9:49 pm

    Governments regulate industries that produce necessities such as these because they are just that, necessities. Some people cannot afford the good at the monopolistic price and therefore governments need to regulate these prices. More so, profits are evidently not producing more competition and therefore defeats the purpose of allowing free markets.

    They would think de-regualtion would result in lower prices because the profits of the industry would attract new firms creating competition and consequently creating efficiency.

  19. kevinhuangon 20 Nov 2007 at 7:19 pm

    I think monopolies would be better if they were not regulated in the long run. Because as we can see from the fuel market that there have been no advances in technology for the last few decades and this is because companies are not willing to and possibly not able to spend money on technological advancements which would bring greater production efficiency. If monopolies were allowed to grow by themselves, in the end they would all be able to make a profit at the price where most people could afford it because of economies of scale and technological advancements.

  20. Jordanon 02 Mar 2009 at 10:36 pm

    In my opinion, regulating prices and government intervention are very tricky businesses; firstly, because it is very difficult to judge how much intervention is required. Secondly because the second you get a government intervening in a "free market economy", it is no longer a free market, and this may leads to socialism scare. It is like we are seeing at the moment, the government cannot buy companies who are in debt, because that would quite simply be leading towards government run enterprises which is a socialist ideal. For this reason, the government have to give bail out money to companies, which cannot be tracked or controlled by the government, meaning that it may not even go towards fixing the recession which is leading to a lack of liquidity in the economy. When it comes to monopolies, in my opinion they are unfair, because they are basically the perfect chance for companies to stitch up the consumers. However, it is my opinion that the government cannot instigate price ceilings to regulate the prices; no government has the ability to regulate every monopoly in the world, or even create a sense of fairness to them, because prices are very individual to the products, no two monopolies can be limited the same way. So who are the government to create figures and rules which are "fair", because what is in the best intrest of the government may not be in the best interest of the economy, or the marcket.

  21. Trevor.echl.f09on 06 Dec 2009 at 11:47 am

    In these industries, there is usually a company with a monopoly over the market. As a result, they will do what most monopolies do and set the price where the marginal costs intersect with the marginal revenue. This results in relatively high prices and a low output level. This allocative inefficiency hurts the consumer who has to pay more for a good than its cost to the firm. Governments step in, setting price ceilings and using other techniques in order to bring prices to a reasonable point, often where the average costs curve intersects the average revenue curve.

    The thought process behind believing t hat deregulation would result in lower prices results from a narrow view of the idea of markets and competition. They feel that if competition was open to anybody, firms would compete for the most efficient way to provide electricity which would result in lower prices. They believe that this is what competition will foster.

  22. Trevor.echl.f09on 06 Dec 2009 at 11:57 am

    Jordan,

    Your point is fine and well when in the context of an economy that is not hurdling towards depression. The government involving itself within the complicated world of finances can create an imbalance in the market structure and political strife such as socialism, an ideology spat on by the majority of American society. However, when in the context of current economic times, these "bailouts" are necessary due to the fact that without a government rescue, some firms will bring down the whole economy with them if they fall. Due to the fast action of many governments across the world, this situation was mostly avoided. But take for example one instance in which the United States decided not to rescue Lehman Brothers. Their fall shook the very timbers of the economy and many were afraid we would spiral into an economic depression. So I understand your point but the context must definitely be considered when arguing against government intervention.

  23. Mattea.echl.f09on 07 Dec 2009 at 11:10 am

    In a monopoly, a firm can set their prices at the profit-maximizing point where MR=MC because the lack of competition results in inelastic demand. However, this is often bad for the consumer, as marginal cost is less than price. This results in allocative inefficiency. In order to make prices more reasonable for the consumer, the government sets a price ceiling at the break-even point. Some states, however, believe that deregulation will in fact result in lower prices. The supernormal profits a monopoly makes should attract other firms, and increased competition will push down prices. Obviously, that's not happening in this case.

  24. Mattea.echl.f09on 07 Dec 2009 at 11:21 am

    Trevor,

    I think you're a bit quick to say that supporters of deregulation have a "narrow" view. Increased competition does actually lead to lowered prices. This is why, in a perfectly competitive industry, supernormal profits are impossible in the long run. Increased competition pushes the supply curve to the right, lowering prices and eliminating supernormal profits. Deregulation hasn't lowered prices here, but that doesn't mean it never works.

  25. Masaya.echl.f09on 07 Dec 2009 at 8:58 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments regulate the prices in industries such as natural gas and electricity by setting price ceilings where the price is equal to the firm’s average total cost so the firm can continue to operate under normal profits. This price ceiling is called the “fair-return price.” The intention behind this policy is to restrict the firms’ exploitations of its monopolistic powers. If the price ceiling is not set in the industry, the firm will continue to sell their products or services at higher prices at a relatively low output. In doing so, they would continue make tremendous amounts of supernormal profits. Essentially, the government regulation on prices will put a stop on these exploitations.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    A state government would think that de-regulation of the electricity industry might eventually result in lower prices in the long run because accordingly to Economics Darwinism, more competitive firms will be attracted to industries that are making large amounts of supernormal profits. Such entry into the industry would force the pre-existing firms to produce more effiecinetly in order to compete with its rivals.

  26. Masaya.echl.f09on 07 Dec 2009 at 9:03 pm

    Trevor>>

    But us as consumers, don't we want to have lower prices on products? I generally think that because economy is driven self-interest, if anything is beneficial for us individually, people tend to become supporters of that. And true, it can be said the other way, if we are the CEO of a firm that has monopoly over a certain industry, sure, we would want to make as much as profit we can make. We NEED to look at economics from a multiple lenses, not only your personal views about it.

  27. Sara.echl.f09on 08 Dec 2009 at 12:26 am

    1. In some cases the government needs to regulate the prices in industries because if there is only one provider for electricity, for example, the company has the power to change the price to whatever they need it to be, meaning they could increase the price a lot to maximize their profits. The government regulating the prices stops them from getting out of control and overpricing the goods.

    2. De-regulation of the electricity industry might eventually lead to lower prices in the long-run because the company would initially increase their prices a lot and the amount of consumers would decrease actually causing a decrease in profits. Because of this, the company would eventually decrease its prices to appease the consumers, so the price would limit itself naturally.

  28. sara.echl.f09on 08 Dec 2009 at 12:30 am

    In some cases the government needs to regulate the prices in industries because if there is only one provider for electricity, for example, the company has the power to change the price to whatever they need it to be, meaning they could increase the price a lot to maximize their profits. The government regulating the prices stops them from getting out of control and overpricing the goods.

    De-regulation of the electricity industry might eventually lead to lower prices in the long-run because the company would initially increase their prices a lot and the amount of consumers would decrease actually causing a decrease in profits. Because of this, the company would eventually decrease its prices to appease the consumers, so the price would limit itself naturally.

  29. sara.echl.f09on 08 Dec 2009 at 12:32 am

    Margaret,

    I agree with you about the profits attracting ne competition, I didn't think of that. But if the government only wants one company in the electricity industry what would happen would the prices still decrease in the long run?

    Sara

  30. dennis.echl.f09on 08 Dec 2009 at 1:58 am

    Governments regulate prices in such industries because they are natural monopolies and if left unregulated, will take advantage of the consumer by hiking up prices and minimizing output. They need to be regulated so that we, the consumers, can all be satisfied. If energy were left unregulated, the prices would be obscene and it would be very difficult for a large majority of people to afford.

    A state government might think that de-regulation of the electricity industry would lead to lower prices in the long run because more firms will enter the industry and force the price down. However, seeing as the electricity industry is a natural monopoly, I see this prediction to be untrue. A natural monopoly provides many barriers to entry and I don't think there will be much competition entering the industry due to this. Thus, the natural monopolies must be regulated.

  31. dennis.echl.f09on 08 Dec 2009 at 2:05 am

    Hey Sara,

    The electricity industry is a natural monopoly so there is no reason for them to ever decrease prices because they are the only firm in the industry, so I dont think that that is what state governments think will cause price decrease in the long run, no?

  32. chamonix.echl.f09on 09 Dec 2009 at 2:41 am

    1. Governments regulate prices in industries such as natural gas and electricity because these industries often have natural monopolies. As they are monopolistic, these firms are price-makers which means that they determine the price which the consumer will pay for their good or service. If these firms raise their prices, some people will not be able to afford enough of what they offer—for example, electricity, water, or natural gas. If the government places a price ceiling on the firm, then they will not be able to hurt consumers by limiting their access to necessities. The firm will also not be able to make supernormal profits at the expense of the consumer.

    2. A state government might think that deregulation of the electricity might result in lower prices in the long run. This is because of the competitiveness of the market. Firms by nature want to make a profit. If a firm with a natural monopoly exists under price ceilings, it will only be making normal profit. However, if the firm is deregulated and has high prices, then it may make supernormal profits. This would attract new firms to the industry. The firms would be in competition and would both lower their prices to attract customers. Therefore, some speculate that deregulation would lead to lower prices.

  33. chamonix.echl.f09on 09 Dec 2009 at 2:44 am

    Hey Dennis,

    I agree with you that monopolies have barriers to entry. I was just wondering what specifically those might be for the electricity industry. There are large sunk costs and I am sure that it would take a while to begin making a profit, but I can't think of many real, regulated barriers to entry. The only ones that come to mind are safety regulations regarding electricity. Can you think of any others?

    Great contribution,

    Chamonix

  34. Eline.echl.f09on 09 Dec 2009 at 8:50 am

    Industries such as natural gas and electricity, or in other words monopolies, try to obtain maximum profit by producing at the point where MR=MC. This makes them allocatively inefficient, producing at a price higher than both AC and MC, and productively inefficient, producing at a cost that lies higher than the lowest point on the AC curve. Therefore these industries produce at higher prices and lower output, and this is not beneficial to the consumers – so governments will regulate prices.

    The state government assumes the de-regulation of the electricity industry might encourage new firms to join the market, because of the possibility of earning supernormal profits, and thus increase competition and lower prices.

  35. Priya.echl.f09on 09 Dec 2009 at 10:15 am

    Natural gas if left unregulated would fair from cohesion, monopolies, and trusts. Also if a monolpoy emerged the fact that natural gas is a very limited resource prices would increase at an alarming rate. Also the use of natural gas may be harmful to future generations which is an unrepresented consumer base. The barriers to entry strengthen already advantaged monopolies. The arguement against that is with the creation of a more global market with more choices consumers do not have to settle for a certain, type, brand, or choice.

    Deregulation in any sector lowers prices because regulation as a responsibility is shifted from the government to the consumer.

  36. Priya.echl.f09on 09 Dec 2009 at 10:18 am

    Eline

    I agree that the government does make that assumption but at this point especially with localities in place deregulation is more of a ideological theory then a feasible issue. I like your explanation, I had been having a hard time understanding MC=MR before I read yours and Chamonixs reply.

  37. Priya.echl.f09on 09 Dec 2009 at 10:20 am

    Sara

    I agree with you completely on the idea of why would they want to lower prices if they are the only competitors because of strong barriers of entry

  38. Felipe R-Lopezon 09 Dec 2009 at 11:53 pm

    1.Why do governments regulate the prices in industries such as natural gas and electricity?

    Government would want to regulate natural gas and electricity prices because it would ensure that every household and individual would have access to these necessities, in order to cook, have lights, watch TV (less of a priority, to be sure), etc.

    2.Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    The theory is that, if deregulalation results in economic profits for the electric industry, this would attract other firms into the market, and this would force down prices to the socially-accepted price.

  39. Jasonon 10 Dec 2009 at 1:26 am

    Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments regulate the prices because if they didn't, the firms would raise their prices until MR=MC, which could be a price that many consumers couldn't pay. As the industries are needed for living, the government often subsidizes or places a ceiling on the price so that prices are reasonable for the average consumer.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    If the price raised high enough, some new firms might be able to afford to enter the industry, and turning it into an oligopoly, where both firms in the long run, would provide competition for the other, eventually lowering the price.

  40. Marcelo.echl.f09on 10 Dec 2009 at 3:58 am

    Indeed, as most people have already mentioned, governments use regulation to prevent firms raising prices to their profit maximization which invariably results in lower output but higher prices: logically, this leads to under allocation of resources, inefficiency, and angry consumers. Thus, governments usually establish price ceilings to avoid such situations.

    However, other types of governments believe that de-regulation is more appropriate, since if the so-called 'natural monopoly' is enjoying supernormal profits, due to their profit maximization policy, the situation would attract more eager firms into the industry, and thus, through increased competition, lower the prices and achieve efficiency. Nevertheless, if we consider such theory, I would define the term 'natural monopoly' as obsolete, since such firms are only behaving as classic monopolies.

  41. Marcelo.echl.f09on 10 Dec 2009 at 4:11 am

    Felipe,

    I definitely agree with your point about watching TV being a crucial factor for our survival, and I utterly like the term 'socially-accepted price:' it is quite original and true. In addition, you went further in your interpretation of the question, as you not just explained the fact that natural monopolies are prompt to under allocate resources, but you also explained why people need the efficiency obtained from regulations, I mean lights, cooking and of course, unforgettable, watching TV.

  42. Eline.echl.f09on 10 Dec 2009 at 4:15 am

    Good comment, Priya.

    I hadn't thought of the scarcity of gas affecting its increase in price, actually it is a very good point and the state government should have thought of that instead of assuming de-regulation would lower prices. However, the reasons you stated for lowering of prices after de-regulation are not very accurate; as far I know, the actual reason is increased competitivity.

    Eline

  43. Issa.echl.f09on 10 Dec 2009 at 12:32 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    Industries such as natural gas and electricity are natural monopolies. This means that there are large economies of scale that would drive costs down. These industries are also essential goods as society is so heavily dependent on such forms of energy. Because of these factors, governments have to regulate prices in order to stop the firms from over pricing on essential goods, and also stop added competition from reducing economies of scale and increasing prices.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    A stat government might think that de-regulation of the electricity industry might eventually result in lower prices in the long run because the abnormal profits would attract new firms into the market. This would in turn, increase competition and drive down prices.

  44. Issa.echl.f09on 10 Dec 2009 at 12:36 pm

    Hey Eline,

    What do you think would be a more effective stance for the government to take concerning these natural monopolies? Do you think that the De-regulation/ increasing competition is the way to achieve the best prices for consumers, or government imposed price ceilings?

    -Issa

  45. Gavin Steinhublon 11 Dec 2009 at 4:35 am

    As Jason previously (and correctly) stated, the govt. regulates the price on things such as natural gas and electricity to prevent the firm from producing where MR=MC, a price some consumers cant afford. However, there is another reason the government would do this. Because the government regulates prices, the firm is better achieving allocative efficiency. What this means is that basically the firm is producing the right goods, for the right people, at the right price. Without the governments price regulation, the firm may be inefficiently allocating their resources.

  46. Mhairion 11 Dec 2009 at 5:30 am

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments regulate the prices in industries such as natural gas and electricity in order to achieve allocative efficiency so that the right amount is being produced for an affordable price to the consumers.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    A state government might think that de-regulation of the electricity industry would lower prices as an other firm could recognize that there are profits to be made and join the market , which (in the long-run) would increase supply, shifting it to the left and lowering the price.

  47. Mhairi Hutchisonon 11 Dec 2009 at 4:25 pm

    * would increase supply, shifting it to the RIGHT and lowering the price

  48. Thomason 11 Dec 2009 at 4:33 pm

    Governments would want to regulate the prices in a natural monopoly or even normal monopolies because they don't want an under efficient market in their economy. They will regulate the prices so that both the consumer and the firm benefit equally from the trade of the firms. If left to operate where the firm wants the price will be where MR=MC and many consumers will not benefit from the price being there so since the product is necessary the government must regulate the price.

    If the price was left then new firms would be able to join the market because they can see the profits that can be made from joining the industry. So the supply would shift to the left and the price would go down.

  49. Christa_bon 11 Dec 2009 at 6:42 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    Electricity companies and Natural gas companies are examples of a monopoly. The government regulates the prices of these industries to achieve allocative efficiency. If the government did not do this then the firm's would produce at the level which MR=MC, to maximize profit, which does not allocate the resources of the firm efficiently.

  50. Gelando Makrideson 14 Dec 2009 at 10:47 pm

    1. Because these industries are monopolies, they have a profit maximization point that is unfavorable to consumer surplus. This also results in a dead weight loss and this point is therefore allocatively inefficient. In order to maintain allocative efficiency, the government will regulate the product prices.

  51. Catherine.echl.f09on 16 Dec 2009 at 10:08 am

    Governments regulate the prices in industries like natural gas and electricity to protect the consumer from harmful monopolies. Monopolies tend to sent unfair prices for their services, which means that their prices are much higher than the actual cost of operating the firm. This causes allocative inefficiency. As a result, the government may choose to regulate the prices in some industries to make sure that services remain affordable to the consumer.

    Governments think that, through de-regulation of the electricity industry might result in lower prices because of competition between firms. Typically, when one firm is making a supernormal profit, other firms are drawn to the industry in hopes of making a high profit as well. However, the additional competition causes all the firms to lower their prices, thus eliminating supernormal profits. In the long run, firms will set lower, more competitive prices to attract more business.

  52. Catherine.echl.f09on 16 Dec 2009 at 10:19 am

    Hey Masaya,

    I think it is really interesting that you mention Darwinism in your response. Essentially, the competition between firms is survival of the fittest. Do you think that small firms have any advantages when facing a monopoly? I think that would depend on how efficient the monopoly is, as well as on the industry in question.

    – Catherine

  53. victoria.echl.f09on 06 Jan 2010 at 12:43 am

    Governments regulate prices in some industries because they are natural monopolies such as electricity, gas and water. The government has to regulate the prices there as otherwise these industries will take advantages and set the prices high for products that are needed so automatically the customers are forced to buy the product at a high price and a lot of customers will not be able to afford the needed product.

    A state government might think that de-regulation of the electricity industry would make that lower prices will be available because more firms will enter the electricity market and this will make competition for all the firms and so the prices will lower. This might be a realistic idea.

  54. victoria.echl.f09on 06 Jan 2010 at 12:47 am

    Priya

    I really like how you mentioned the point about the fact that there is only a limited amount of natural gas and that this will lead to a high increase in price if the government wouldn't regulate the price.

    Vica

  55. Noraon 15 Jan 2010 at 5:46 pm

    1. Governments regulate the prices in necessary industries such as electricity because these industries tend to be natural monopolies. For these monopolies there is a wide range of output over which they experience economies of scale, causing them produce at a low level of output and at a high price. The quantity produced will be where marginal cost equal marginal revenue and the firm makes most profit. The problem is that since the firm is the industry, these necessities such as natural gas will be produced at allocative inefficiency, meaning that there will be too little produced at a too high price to satisfy society’s needs. It is in the government’s interest to provide the right amount of electricity to the right number of people. This is why most governments set a price ceiling equal to the average total cost, allowing the monopoly to break even.

    2. De-regulation of the electricity industry would mean that the firm can produce at its profit maximization point, and would lead to greater profit. This would attract more firms into the industry, making the market more competitive. The competition between the firms in the electricity market would force the prices down in the long-run to the price and level of output that is needed by society.

  56. Sarah Ebleon 18 Jan 2010 at 2:16 am

    1.Why do governments regulate the prices in industries such as natural gas and electricity?
    Governments regulate the prices in industries such as natural gas and electricity because those goods are necessities for the population of a country and unregulated, the prices would be extremely high and the quantity supplied extremely low since companies that produce/supply electricity and gas are in a monopoly.

    2.Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    A state governemnt would think that de-regulation of the electricity industry might eventually result in lower prices in the long run because the high economic profits a monopolistic firm supplying electricity makes attract other firms. Therefore more firm would enter the market and the competition would lower the price. But this doesn’t work out because the barriers to entry are (almost) impossible to overcome.

  57. Hannaon 17 Jan 2010 at 9:03 pm

    Governments regulate the prices in industries such as natural gas and electricity because the firms in those industries tend to be natural monopolies. This means that there are large economies of scale, which causes the costs for the firm to decrease, allowing them to earn abnormal profits. In order to increase profit, the monopolist restricts the level of output in order to raise the price. Although that is beneficial for the monopolist, it can hurt society because the products are being under-allocated. In order to solve this problem, the government will place a price ceiling which is lower than the original price, which increases the level of output to satisfy society’s need and causes the monopolist to earn normal profits.

    A state government would think that de-regulation of the electricity industry might eventually result in lower prices in the long-run because the natural monopolist will earn large abnormal profits. When other firms realize that such high profits can be made in that industry, they will want to enter that industry, establishing competition between the two firms. In the long run, that would lead to a decrease in price since the prices would be competed down to equilibrium price.

  58. Duy Anhon 18 Jan 2010 at 12:20 am

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    First of all, the utility industries such as natural gas and electricity are those that can be considered natural monopoly. Also, in order for these firms to be natural monopoly, it must have very large economies of scale, that means eventually, the costs to produce will decrease, and therefore firms can earn abnormal profits. Moreover, a goal of a firm is to maximize their profits, so the monopolist with no restriction and regulations, might want to also maximize its profits by lowering the output, and therefore increase the price. Because of this, governments will regulate the prices in those utilities industries, keeping them just breaking even, by using the "fair-return price". This lowers the price of the product, as a result increases the output, but still keep the firm running.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    If there are no regulations whatsoever on the prices of the electricity industries, in the short-run, the industry will charge higher prices, and they get more abnormal profits. In the long-run, there will be firms that are attracted to the profits being made in the industry, and therefore more firms will enter the market, breaking the monopoly state. As a result, there will be competition between firms, and drives the price lower.

  59. Alain Meyeron 13 Dec 2010 at 2:06 am

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments regulate these industries because the model that would provide society with the greatest welfare would be that of a natural monopoly. Both of these particular industries happen to have extremely high fixed costs, and so a firm must have very high output to even begin to be profitable. One might say that they should have very large economies of scale before they can turn a profit/break even. Since monopolies naturally want to lower output to raise prices, governments need to regulate them so that people don't end up with no electricity or water.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    Deregulation might provide other firms with incentive to join the industry after seeing that the single firm there is making a profit. As other firms join, the industry supply curve shifts to the right, driving down the price for consumers. However, there are very high barriers to entry, so this is potentially unrealistic.

  60. Eamon Emonsta Stensoon 13 Dec 2010 at 4:43 am

    Why do governments regulate the prices in industries such as natural gas and electricity?

    Since Eletricity in Zurich is an Monopoly they could charge any price they wanted to as its the only company supplying the eletricity, thus meaning they could charge any price they felt like. The goverment regulates it so the prices are at a consumer level so people earning normal profits can afford it.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    As other companies see the profit pie, companies will want to enter and making supply shift outward making demand shift inward but this is ineffiecent because the start up costs and the economies of scale would be billions to start up and they would have to put up power lines etc, so this is completely unture

  61. Pilar Mulleron 13 Dec 2010 at 6:51 am

    Why do governments regulate the prices in industries such as natural gas and electricity?

    For governments it is a hard task to regulate all prices in the different industries and especially with natural monopolies. Governments want to regulate the prices in order to see the social good in the market. Most governments regulate natural monopolies like natural gas and electricity firms in order to force them to make lower their prices, which in turn allows the firm to provide to everybody in the nation those necessary things.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    There are two possibilities. The first possibility is the one of economies of scale, where as the industry expands and becomes bigger, the ATC get smaller and smaller. However, if the government is not intervening, the natural monopolies can also turn to become a perfect price discriminant. In this case, the firm (let's say a house seller), acquires information about his customer and tries to guess his rough income and then sets a special price. What's special about this price is that it changes from one traveller to the next one. This form of perfect price discriminator, also assures great total revenue and total profits for the firm, since then deadweight loss is eliminated and consumer surplus as well. This, of course, shows that that market is not really fair but still it is thought to be efficient since it lets then maybe poorer people to pay less for a house or a car.

  62. Adrianon 13 Dec 2010 at 5:59 pm

    Why do governments regulate the prices in industries such as natural gas and electricity?

    Because they are scarce resources and the government is trying to limit consumption. They also want to limit them because they are damaging to the environment. This is why barriers to entry are so high for these monopolies. Government intervention harms the market because it causes welfare loss in its inefficiency.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    De-regulation would end up in high prices because then the market will set the price. Firms will be able to charge any prices at the beginning but then competition will appear, due to de-regulation, and other firms will begin charging lower prices. This would then end in a long run equilibrium.

  63. Christophon 14 Dec 2010 at 3:24 am

    Firms providing electricity or gas are natural monopolies and experience economics of scale. In order to maximize their profit, these monopolies will lower their output, so that the price of their good will increase. Gas and electricity are necessities for most people and without any government intervention, many of them won't be able to afford these goods. Governments regulate prices to make products more affordable for society.

    If the government does not regulate prices, monopolies will earn great profits. Other companies get attracted by these profits and join the market, in hope of getting a share of the profits. As the number of firms in a market increases, supply rises and prices will decrease.

  64. Anuon 15 Dec 2010 at 1:42 am

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments regulate prices in industries such as natural gas and electricity to counter natural monopolies and ensure utility firms are allocative efficient. Through regulation, firms must price their services where price = ATC so that they break even and remain in the market, but also produce more electricity or gas and at a cheaper price. On the other hand, governments could also regulate such utilities by taxing them in order to limit consumption and environmental damage.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    A state government would think that de-regulation of the electricity industry might eventually result in lower prices in the long-run because more firms would be attracted to the utilities market. As the number of suppliers increases, the state government thinks that prices will fall.

  65. Graham N.on 16 Dec 2010 at 12:41 am

    1. Governments regulate the prices in key industries to keep them productively efficient as well as to keep the prices as low as possible for consumers.

    2. A state government might think that deregulation would eventually lower prices because firms would be attracted to the profits and eventually enter the market, driving prices down. However, these firms are typically natural monopolies, a market that multiple firms do not enter. There are incredible barriers to entry.

  66. Alisha MacIsaacon 18 Jan 2011 at 6:15 am

    Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments regulate the prices in these industries because they are essentials to society and if the firms in charge of natural gas and electricity were not regulated they would raise prices and lower the quantity available, making it difficult for everyone to be able to afford.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    In the long run, when it became apparent to other firms that there are profits to be earned in the utilities industry, competition would force companies to be more efficient and lower prices in order to stay in business.

  67. Susanne Robertsonon 18 Jan 2011 at 10:51 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    If non-regulated, industries like electricity, would charge at the profit-maximizing quantity (MC=MR) which is at a very high price. Obviously, this high price means higher profits for the firm, yet there is an under-allocation of resources. Ultimately, this hurts the consumer as, in some cases, the price is too high for people to afford. Electricity being a necessity, governments should regulate the prices to the price=ATC level, where the firm is only making normal profit. At this level, most consumers should be able to afford electricity.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    Initially, the government regulated electricity industry would have high prices as monopolies are generally very inefficient. If this industry was open to competition, the firm would be forced to improve efficiency in order to stay in the market and increase their market share, which would therefore lower prices.

  68. Philippaon 19 Jan 2011 at 12:00 am

    Why do governments regulate the prices in industries such as natural gas and electricity?

    The government want gas and electricity to be available to all consumers so that it is both affordable and obtainable. If an industry were to try to maximise it's profits, it would produce where MC=MR which would lead to allocative inefficiency which means electricity prices would be high, and there wouldn't be much electricity to satisfy all consumers. Therefore, the government needs to make a deal with the monopoly in order for all citizens to have access to gas and electricity.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    Deregulation refers to the removal of a price ceiling in order to cap prices to make electricity available to all. This would increase profits so more firms would try to enter the market. If there was competition between firms, firms would have to lower prices in order to gain a large market share proportion.

  69. Lisa Con 19 Jan 2011 at 11:02 am

    1.Governments regulate these prices due to the fact that these firms are called Natural Monopolies which means they are monopolies because that is what makes more sense for the market. However, seeing as they are a monopoly, we’d think they’d try to charge the highest price possible for their product. In a market selling fuels and electricity, a necessesity to almost all human beings, the highest price will create difficulty for many customers. The average citizen will not be able to pay for thei fuels and electricity. This is why the government can put a price ceiling on, which means that they tell the Natural Monopoly firm the highest price they can charge. This will then result in the market breaking even, earning them a normal profit; just enough to keep the firm going.

    2. The government might with think due to the fact that eliminating price ceilings will eventually lead to economics profits for the firm which will then attract others into the market. This would then lead to increasing competition which would mean that the firms would have to achieve Allocative efficiency.

  70. Sarah Eggeron 19 Jan 2011 at 1:57 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    The government regulates the prices in industries such as natural gas and electricity because they are essential to society. If the government wouldn't regulate the price for (ex.) electricity, the price would rise and quantity would decrease, meaning that not everybody would be able to afford this good and there wouldn't be enough either.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    A state government would think that de-regulation of the electricity industry might eventually result in lower prices in the long-run because other firms will get attracted to the utility market when profits are made. This would increase competition and make companies work more efficient and lower prices.

  71. Francesca Perversion 19 Jan 2011 at 2:04 pm

    1.Why do governments regulate the prices in industries such as natural gas and electricity?

    Prices would be regulated by the government in order for Natural Monopolies to become allocatively efficient. all profit maximizing firms will produce where Marginal Revenue will equal Marginal costs. The problem producing at that point is that the firm is allocatively inefficient where price does not equal marginal costs.So governments regulate the prices in key industries to keep them productively efficient as well as to keep the prices as low as possible for consumers.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    A state government might think that de-regulation of the electricity industry would lower prices because an other firm could recognize that there are profits to be made and join the market, which would increase supply, shifting it to the left and lowering the price.

  72. Reem Hassanon 19 Jan 2011 at 2:09 pm

    1.Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments regulate prices in industries such as natural gas and electricity inorder for all citizens to afford electricity and natural gas.

    2.Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    it would result in lower prices in the long-run because people would not be able to afford the prices which leads the industry to lower their prices to earn profits

  73. Nathan Pon 19 Jan 2011 at 6:48 pm

    1. Governments regulate the price in these markets because both products are necessary for our day to day modern life, and the higher the price, the less amount of people will be able to buy the goods, and a countries government would want the price lower as part of their political agenda.

    2. A state government would think that deregulation would result in lower prices in the long-run because the high profits in the short run would attract other firms to join the market, which would then drive the prices down with the new competition.

  74. Chris Bertramon 19 Jan 2011 at 8:08 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments regulate the prices in these kind of industries because they don't want the firms to produce at an output where MR=MC. This is because the price at this level of output might not be affordable for every household. A price ceiling is created so that the consumers are charged a reasonable price and the firms are breaking even.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    Deregulation might provide other firms with an incentive to join the industry as it would lead to an increase in profits for the firms in the industry and firms seeing this would be willing to join. This would mean that the supply would increase resulting in a lower price for the consumer. However, there are high barriers to entry as companies would have to build their own highly expensive infrastructure to get the electricity to the households. Therefore, this idea does not seem to be feasible.

  75. Emma Walwyn Brownon 19 Jan 2011 at 8:33 pm

    1.Why do governments regulate the prices in industries such as natural gas and electricity?
    The governments regulate the prices of these industries because it is important that all households and afford these utilities. If the firms were to produce at MC=MR, the price would be too high for many households to pay, which would not benefit society.

    2.Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    Deregulation would allow the firm to produce at a quantity to maximize their profits, rather than at the quantity to break even when taking the governments allotted price. With firms in the market making profit, incentive if given to other firms to join the market. This increase in supply would lead to a decrease in price.

  76. Alexandre Kleison 19 Jan 2011 at 10:00 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments regulate the prices in industries such as natural gas and electricity in order to ensure that everyone has access to those basic resources. Since firms are often times monopolists, governments do not want them to charge consumers at the point where the marginal cost equals the marginal revenue, leading to high prices, and a low quantity of output. Therefore, governments can ensure that firms produce at a level of output, which is as favorable for the firm as for the consumer.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    A de-regulation of the electricity industry might encourage a firm to produce at the profit maximizing level of output. At this time, other firms might see an interest in joining this market since profits are being earned. Further firms would join the market until no more economic profits are being earned. In this way, the market would become more competitive and it could eventually results in lower prices in the long-run. However, this would be highly unlikely as there are high barriers to entry: the infrastructure needed for the distribution of electricity to the consumers is very difficult and costly, for example.

  77. Orpa Alamon 19 Jan 2011 at 10:14 pm

    1. The government regulates the prices of industries, like natural gas and electricity because it is a necessity for households, and is required to have a acceptable living standard. Therefore in order to make sure the firms don't raise their prices to high and make sure it is affordable to the whole population.

    2. Well with de-regulation other firms, may join the market creating competition for the previously monopolistic firm. The more competition leads the firms to increase their efficiencies. Also more firms would then lead to the supply increasing and that then in turn to the price decreasing.

  78. Beatrice Benderon 19 Jan 2011 at 10:15 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments tend to regulate the prices in industries such as natural gas and electricity to make these goods affordable for the society and not to depend on foreign resources and keep these industries producing efficiently. If the government were not to regulate the prices, these industries would set much higher prices and would produce less, which means inefficiency.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    De-regulation of the electricity industry might eventually result into lower prices in the long run, because more firms will enter the market thus dropping the price of electricity making it easily affordable. Since the number of firms in the market will increase, the supply will increase and in order to stay in competition the firms will have to lower their prices.

  79. Larissa Wezenbergon 19 Jan 2011 at 10:52 pm

    1.Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments regulate their prices in industries such as gas and electricity to still to satisfy their consumers. If an industry such as gas and electricity would maximize its profit, where MC=MR, they would produce at an allocative efficiency. This means that prices will be high for the consumers and they would not be satisfied as there wouldn’t be a lot of electricity. This is why governments regulate the prices in those industries, and keep it as low as possible for the consumer.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    A state government would think that de-regulation of the electricity industry might lower because further firms might join the market as they will be able to see that there are more profits to be made. They would joint until no economic profit is earned anymore. This means that the market would become competitive and will eventually lower the prices.

  80. Mishari Aleisaon 19 Jan 2011 at 11:11 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    To put it bluntly, governments must ensure that even the poorest consumers can afford necessities. If monopolistic firms were to produce at MR=MC, there would be too less of a consumer surplus. The government regulates the prices to get closer to MC=AR to benefit the consumer and to ensure a better allocation of resources.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    A state government would be led to believe that (if they didn't take high-school econ, that is) de-regulation of electricity would result in lower prices in the long run, due to believing that natural monopolies act like perfect competitors. Since there are high barriers to entry, economies of scale, it is unlikely for any other firms to come in to the market. If competitors did enter, which is still possible, it would be far more expensive for the consumers in the long run, as in any natural monopoly, society is better off (more productively efficient) with only one firm producing the product.

    Thanks, Mr. Welker.

  81. Maphrida Forichion 19 Jan 2011 at 11:12 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    Natural Gas and Electricity are an essential utility, and by regulating the prices, the government achieves to make production of these utilities more efficient and more accessible to many consumers.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    De-regulation of electricity will cause an incentive for other firms to join the the market. And with more firms comes more competition, therefore the companies will increase their efficiency and compete by selling at lower prices

  82. Nathanon 20 Jan 2011 at 11:33 am

    Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments regulate prices in industries such as natural gas and electiricity, because, if these firms were unregulated resources would be underallocated towards the production of electricity, and the price would be a lot higher than the socially optimal price. Hence, since both those products are viewed as necessities and the government wants as much of its population to have access to and be able to pay for these comodities, they set a maximum price that can be charged for the product, in order to protect consumers from the profit-driven monopolist.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    A state government could think that the de-regulation of the electricity industry might eventually result in lower prices in the long-run because, the state governments believed that, by removing price ceilings the companies would increase their profits, and hence the market would attract more producers and the amount of companies providing in the electricity market would go up. Since the larger amounts of producers means more of the product is made, the price should in theory be driven down until each firm just breaks even, and therefore produces and sells at the socially optimal level.

  83. Markel Zuritaon 23 Jan 2011 at 4:47 pm

    1. Governments regulate the prices in industries such as natural gas and electricity in order for there to be enough for all customers who are demanding these services. Since these industries are most often natural monopolies, governments do not want them to charge consumers at the point where the marginal cost equals the marginal revenue. This is because the MC=MR point leads to high prices and a low quantity of output since resources are not being used efficiently. The government therefore ensures that the firm is earning a profit which is at least in the break-even point and also making the prices more affordable. This is both convenient for the firm and the consumers.

    2. If the government does not regulate prices, monopolies will earn greater profits. Other companies will be attracted to the market and therefore join it in hopes of getting a share of the large profits being made. The number of firms in the market would therefore increase, as well as supply, and the price would decrease. This however, is very unlikely since services such as electricity and water are most often provided by one firm, because of the infrastructure and because it is easier. The high barriers to entry would see to it that smaller firms would not join this market.

  84. Cedricon 24 Jan 2011 at 11:23 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments regulate the prices in industries as natural gas and electricity because the government wants to make sure that every consumer has access to those basic resources. Due to the fact that firms producing natural gas and electricity are monopolists for the majority of the time, the government does not want the firm to produce at MC=MR because in this case, the firm is under allocating its resources, producing less, so the price of the resource increases. Therefore, the government regulates the prices so that firms produce at a level which is favorable for both the firm and the consumer.

    2. Why would a state government think that de-regulation of the electricity industry might

    eventually result in lower prices in the long-run?

    A state government would think that de-regulation of the electricity industry might eventually result in lower prices in the long run because in the long run, other firms will seek economic profits, joining this market. Therefore, with an increase in firms, efficiency increases, leading to lower prices for electricity.

  85. Solon 31 May 2011 at 11:02 am

    I like you site. The explanations are plainly put. Thanks you

  86. Simona Cajkaon 08 Feb 2012 at 11:51 am

    1.Why do governments regulate the prices in industries such as natural gas and electricity?
    Governments chose to regulate the prices of some industries like natural gas and electricity that are monopolies, so that majority of the population can afford to use and purchase these necessities. Many of these industries used to be in the public sector, and have been privatized e.g. in England, so it's important to still keep them accessible to the public.

    2.Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    If the government will stop regulating prices for companies such as the electricity industry, the firm can charge more and therefore achieve higher profit. This will act as an incentive for other firms to join the market because they will be attracted to this profit. More firms, means more competition so lower prices, and also in theory when we increase supply the price should decrease.

  87. Simona Cajkaon 08 Feb 2012 at 11:56 am

    Hi Markel, I really like your post and agree with your thoughts on these questions! You explained the first question in a lot of detail and very well! It helped me to understand the whole issue better. I especially liked how in the second question, you gave a counter argument about the high barriers to entry. It made you answer more realistic and you showed that you can apply previous knowledge of monopolies well.

  88. Morpanaon 10 Feb 2012 at 6:10 pm

    1.Why do governments regulate the prices in industries such as natural gas and electricity?
    Governments regulate the prices in monopoly industries such as those of natural gas and electricity because a monopoly if left to decide for itself as to what quantity and at what price it should produce it will produce at a socially undesirable point MC=MR, whereas it could produce at an allocatively significantly more efficient output such as ATC=P, which is still feasible as the firm is “breaks even”, neither making profit or losses, as by definition the average revenue is equal to the average cost. The production point of MC=MR maximizes profit is a lower quantity and higher price than what is desirable, and is allocatively inefficient as the firm is not producing at the minimum ATC, and could produce much closer to this ATC if producing at ATC=P.

    2.Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    The state government assumes that the deregulation of the prices which allows profit maximization would draw in new firms, increasing competition, which would make the firm no longer be a monopoly and would therefore result in a lower price. Notable, however, the logic is flawed because in most cases firms cannot enter the market because of the massive barriers to entry that exist.

  89. sophie zhouon 12 Feb 2012 at 2:13 am

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    Government wants to regulate the prices in monopoly industries such as those of natural gas and electricity because when a monopoly is left to decide at what quantity and price it should produce, it will produce at a good rate MC=MR. On the other hand, it might be able to produce at a much more efficient output as ATC=P, which is still possible to make just enough, meaning not making money or losing money. The production point MC=MR maximizes profit is a lower quantity and higher price than what is wanted, and it inefficient in its allocation as the business is not producing at the minimum ATC, and could produce much closer to this ATC if producing at ATC=P.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    The state government believe that de-regulation of the electricity industry might eventually result in lower prices in the long-run since they believe it would draw in new firms, increase competition, and make the firm o longer a monopoly which would then result in lower price. Unfortunately, in most cases most firm can't enter the market due to the massive barrier to entry that exist.

  90. sophie zhouon 12 Feb 2012 at 2:21 am

    I agree with your reasoning of why government choose to regulate prices in natural gas and electricity. However, I also believe that is also another way they can maximize profit, since it is now accessible to everyone, almost everyone will buy it.

  91. spoulos2on 12 Feb 2012 at 3:22 am

    1.Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments have chosen to regulate prices on these types of industries (gas and electricity) because these types of goods are part of a monopoly market. These types of goods are needed by the society therefore they have to regulate the prices to make sure the industries are not cheating the system or making an abnormal profit. These types of goods need to be accessible by the public – if the price is too high they will not be able to afford them.

    2.Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    Well if the government decides to stop regulating these prices, the main firm in the industry will decide to increase their price to make as much profit as they can. However, by doing so this will attract other firms – due to the abnormal profit, so firms will join the market. This will create competition and therefore because there is competition the firms will decrease their prices as low as they can beat other firms.

  92. spoulos2on 12 Feb 2012 at 3:24 am

    Good answers, pretty much summed up exactly what I wrote for the questions. I think that the de-regulation by the government would be a smart option because not only will it lower the prices in the long run – but it leaves more options to the consumer, instead of them all relying on the same electrical company or gas company, they can choose from various ones.

  93. kedwardson 12 Feb 2012 at 6:20 pm

    Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments regulate the prices on these industries in particular so that the consumers are able to afford the goods and services. These industries are important for consumers, and otherwise, unregulated firms will produce to maximize profit at MC=MR. Without regulation, marginal cost will be less than the price. So governments regulate the industry to ensure that enough electricity is produced and the price will not be too high for some consumers to afford.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    The idea to remove regulatory price ceilings would give greater economic freedom and profit to firms in the market. As a result, more firms would want to enter the industry. The competitive market theoretically would cause firms to end up lowering each other’s prices by competing with each other, and benefiting both consumers and producers by forcing them to be productively efficient.

  94. kedwardson 12 Feb 2012 at 6:26 pm

    Hi Simona,
    I like how you brought up the relationship to supply and demand. Since the majority of the population are fairly interested in these commodities, it's interesting to consider the potential changes in demand, and behaviors of consumers that would help to regulate the firms' actions. Good point!
    Thanks,
    Katie Edwards

  95. sjowett2on 13 Feb 2012 at 5:25 am

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments tend to regulate the prices in industries such as natural gas and electricity to make these goods affordable for the society and not to depend on foreign resources and keep these industries producing efficiently. If the government were not to regulate the prices, these industries would set much higher prices and would produce less, which means inefficiency.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    De-regulation of the electricity industry might eventually result into lower prices in the long run, because more firms will enter the market thus dropping the price of electricity making it easily affordable. Since the number of firms in the market will increase, the supply will increase and in order to stay in competition the firms will have to lower their prices.

  96. sjowett2on 13 Feb 2012 at 5:30 am

    For the first question, I think another reason is that they don't want to depend on foreign companies to get cheap prices, therefore they make these goods affordable for the society. The government wants to help to society, and for an essential good for every single person, dropping the price of electricity by allowing more firms to enter the market to create competition is a great way!

  97. lgade2on 13 Feb 2012 at 11:09 am

    Hey kedwards,
    I enjoyed reading your response. It was thorough- examining all that was stated in the article, and made the concepts illustrated easy to understand.
    The second answer especially, was interesting. It examined what we learned about perfectly competitive markets; and the fact in such a situation, a firm making abnormal profits in an industry will attract more firms to the industry- eventually resulting in long-term normal profits.
    Thanks

  98. lgade2on 13 Feb 2012 at 11:15 am

    Why do governments regulate the prices in industries such as natural gas and electricity?
    Such industries are often natural monopolies, and therefore produce at an output and price that maximized their profit, but not at the point of allocative efficiency. Governments therefore regulate prices in such an industry in order to achieve allocative efficiency; and make the quantity and price of the product available at a level that is reasonable for consumers. It also prevents the firm from making an abnormal profit; with normal profit the firm has only just enough revenue to remain in business.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    This concept relates to "perfectly competitive" industries. If a firm doesn't regulate prices in an industry of natural monopoly, the firm will be allowed to make abnormal profit. This will, in turn, attract more firms into the industry. This increase in competition will force the firms to lower their prices in order to remain in business. Therefore, in the long run, de-regulation will result in lower prices.

  99. Tanya Deolon 13 Feb 2012 at 12:28 pm

    Hey kedwards,
    I thought you wrote a very detailed response with very good reasoning. I was just wondering though, do you think that another reason why governments regulate prices would be because these natural gas and electricity industries are utilities, and by regulating the firms, governments are preventing the exploitation of these resources?

  100. lzhang2on 13 Feb 2012 at 10:19 pm

    Why do governments regulate the prices in industries such as natural gas and electricity?
    Natural gas and electricity are necessary for our daily life. Prices will be too high for people to afford if the government does not regulate them.
    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    There would be competition to keep the price low. Firms will enter the industry and every firm will try to make the price as low as possible so people will purchase the product from them. Therefore, they gain a profit.

  101. lzhang2on 13 Feb 2012 at 10:22 pm

    Definitely. In a monopoly, the firm may restrict their quantity to make the prices high so their profits will be maximized. That's why government should step in. Natural gas and electricity are necessities of our life.
    It's great that you relate this to the circumstance of perfect competition!

  102. axu2on 14 Feb 2012 at 1:58 am

    Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments regulate the price in industries such as natural gas and electricity because they are needed for our daily living and considering the consumer’s income therefore, to control the price of those firms would be more affordable to the citizens of the nation.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    If there is no regulation on prices for monopolies, the firms will earn maximun profit. Smaller companies would be attracted to join the market, therefore, the number of firms in the market would increase with the number/price of supply. It is a competition to keep the price low, to gain profit.

  103. axu2on 14 Feb 2012 at 2:14 am

    Hi,
    i really like the point where you made about how the industry will decide to increase their price to make as much profit as they can. it is very clear sentence and right off the bat answered the question.!

  104. klake2on 14 Feb 2012 at 2:27 am

    1.Why do governments regulate the prices in industries such as natural gas and electricity?
    Mainly because natural gas and electricity companies are monopolies, therefore they can think that as they have no competition they can increase their price like they want. Governments will have to regulate the prices of it so that people can afford natural gas and electricity.
    2.Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    If the government stops regulating the electricity industry, other firms will enter the industry because of abnormal profit. There will be more competition and therefore the prices will be lower in the long run.

  105. nvirani2on 14 Feb 2012 at 8:19 am

    1.Why do governments regulate the prices in industries such as natural gas and electricity?
    Governments regulate the prices in industries such as natural gas and electricity because most people purchase these services/products. They need to make sure they are affordable for everyone and that the firms aren't just trying to make a high profit of their monopoly.
    2.Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    The de-regulation of the eccentricity industry would create competition. In the long run, they would hope that more companies would join the industry and push down the prices because each company would want to have a lower price than the next.

  106. nvirani2on 14 Feb 2012 at 8:24 am

    Raising the price too high would create issues with providing the service/product to the population. In addition, because the governments don't tax natural gas and electricity, they don't want the firms to be making abnormal profits.
    More firms do lead to more supply, and therefore a possible drop in production costs. This is what they would assume would bring the price down; however, this did not happen as stated in the article.
    Thanks!

  107. hslateron 14 Feb 2012 at 4:43 pm

    1.Why do governments regulate the prices in industries such as natural gas and electricity?
    The government needs to regulate the prices in these industries as the companies tend to be natural monopoliesand they have large economies of scale which means that they will have costs which will be much less than their revenue. As the products are very inelastic people will still buy the products even if the price goes up. This means that the companies will put the price up to as high as they can. Therefore, if the government don't regulate prices, the companies will put the price much higher than is fair to the consumers.
    2.Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    It may eventually lower prices as the prices will firstly go up, but this will then pull other firms into the business as they can see that they are makling abnormal profits. This will then increase competition and eventually lower prices again.

  108. hslateron 14 Feb 2012 at 4:48 pm

    helo kedwards
    I agree with your answer to the quesion and I think that the idea of the abnormal profit acting as a signal to other businesses to come in is a very key idea in the theory.
    hslater

  109. alifsigridardottiron 14 Feb 2012 at 11:17 pm

    Why do governments regulate the prices in industries such as natural gas and electricity?
    They regulate the prices in natural gas and electricity because they tend to be monopolistic which means that without regulatory policies they would have a tendency to produce a much lower level of output for a much higher price than a competitive industry would allow, which is not beneficial to consumers at all. It is important that consumers are able to afford gas and electricity, therefore it is vital that a monopoly doesn‘t take over receiving unfair revenue and operating with anti-competitive behaviour.
    What would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long run?
    The idea is to remove price celings because the theory is that the in the beginning prices will increase but then will attract other firms into the industry due to the abnormal profits, and this would equal everything out because competition will increase and lower prices. The natural competitions between firms in the industry would make the product affordable to consumers.

  110. alifsigridardottiron 14 Feb 2012 at 11:20 pm

    Hi Duy Anh, I completely forgot to mention economies of scale, and that gas and electricity are natural monopolies. I agree with everything you wrote, it was very well organized. I wonder if other firms in the long run will be able to break the monopoly state, despite the attraction of abnormal profits because the monopoly will always have an advantage and an upper hand because of the economies of scale, right? Complicated stuff.

  111. bhejaichon2on 15 Feb 2012 at 3:14 am

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    Both Natural gas and electricity are goods that are tied directly to services needed by every person of every walk of life. A firm’s objective is to always make profit and to have an increasing profit over time, if possible. Markets which require a lot of effort but have an seemingly limitless demand is vulnerable to being abused by the small number of companies able to join. This is seen in both electricity and natural gas and in the cases of regional monopolies, the need for government restraints on price are needed. Regulation ensures that the customer is both able to buy a safe, high quality product and not be paying a price that is unreasonably higher- restricting who can afford it.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    A state may argue that regulation causes increased costs for the business. By reducing the number of quality standards on a company, this will allow more firms to be created. I personally do not think this is true in all markets.

  112. Jackson Truexon 15 Feb 2012 at 4:10 am

    1) Why do governments regulate the prices in industries such as natural gas and electricity?
    The government needs to regulate the prices in these industries because companies tend to abuse the demand for these products and you can see that costs are much smaller then revenue. Due to the fact that these products are inelastic there will still be the same demand for the products even if the price goes up. Companies will take advantage of this and raise prices of these products. Therefore, if the government doesn’t regulate prices, the companies will abuse consumers by increasing prices.
    2) Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    The prices in the short-run in the electricity industry would increase greatly but then you would develop a perfect competition among firms in the long run. More firms will join the market in the long-run and cause a lower price among all.

  113. Jackson Truexon 15 Feb 2012 at 4:13 am

    I think that your post answers the questions well. In the second question I think it would be much easier for you to say that it develops perfect competition but your explanation was great none the less. I really like your post!

  114. Bhejaichon2on 15 Feb 2012 at 4:16 am

    Vica,

    i agreed with priya's comment about your post. You really did very well about the limitation of natural gas, and the fact that how the government set the price ceiling of average total cost, and to balance out the monopoly. Great Post.:)

  115. Monique Ton 18 Feb 2012 at 3:37 am

    Why do governments regulate the prices in industries such as natural gas and electricity?
    In industries such as natural gas and electricity, the large economies of scale tend to result in natural monopolies, rather than competitive firms. Since monopolies – natural or not – will produce at the profit maximizing level (MC=MR) they will not be achieving allocative efficiency, which is ultimately a problem for society as the resources are not being allocated in the proper way. The government intervenes and makes sure the prices are kept low enough that enough supply can be given to the population to ensure resources are being allocated properly.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    In the long run, without a regulation on prices, the monopoly will be able to earn supernormal profits. Since this is ideal, many other firms will begin to enter the market seeing the opportunity, and so the price will begin to fall until all of the firms are making normal profit. Since the profit has fallen from a level of profit maximization to a level of normal profit, the price will be lower in the market. The reason this may not be happening yet in the situation of the article is that the market is still in that transitional period, where prices have not yet fallen, but the market is becoming more competitive.

  116. Monique Ton 18 Feb 2012 at 3:42 am

    Hi Nathan! You raised some excellent points. It is interesting that since these products are viewed as "necessities", the government wants the population to have access – seems like a very important aspect of this situation. I like how you used the word "protect" when describing the actions of governments towards monopolies, as it really emphasizes the fear and concern people have in regard to monopolies, and the fact that their sole purpose is profit maximization. Thanks for your ideas :) -Monique

  117. Arthi Nachiappanon 18 Feb 2012 at 7:40 pm

    1.Why do governments regulate the prices in industries such as natural gas and electricity?
    These are basic necessity, therefore they have very inelastic demand – they are used for a lot of functions which we come to regard as part of daily life, and we will need these to maintain our standard of living. This then means that firms can charge very high prices and we will still (in the short term, until we have an alternative) pay for gas and electricity. However, this could rise to levels which exploit consumers and harm their welfare, with firms becoming complacent as consumers have no substitute – they must continue to buy gas. As the government is responsible for protecting and improving consumer welfare, prices must be regulated in these industries to ensure that they are fair and affordable, without greatly harming the profits of the firm.

  118. Arthi Nachiappanon 18 Feb 2012 at 7:40 pm

    2.Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    A free market approach would often increase competition, as firms have the incentive that they will not be restricted from making excessive profits, encouraging new firms to set up. This increase in competition is likely to benefit the consumer; as there is more supply it is likely that prices will decrease as firms compete with each other for the lowest prices to attract consumers. However in reality, this is unlikely to be the case as industries such as gas and electricity require large networks of infrastructure and firms in these industries often have a natural monopoly for many reasons including the excessive start-up costs. Furthermore, there are also the barriers to entry that any monopoly can create, acting as a disincentive for other firms to enter the market and prices to decrease. But having said that, Royal mail used to have a monopoly in England, which has changed recently as several firms have entered the market despite the start-up costs.

  119. Arthi Nachiappanon 18 Feb 2012 at 7:46 pm

    Hi Sophie :)
    I agree with what you said especially on your second comment – I think the theory behind it is that it will promote competition, but it seems like in most places these industries tend towards a natural monopoly, and there seem to be many other businesses that new entrepreneurs could choose to start up in, why enter one that has such high start-up costs, with the added risk of being squeezed out of the market by a monopoly?

  120. Nadiya Son 20 Feb 2012 at 4:39 am

    1.Why do governments regulate the prices in industries such as natural gas and electricity?
    Resources such as natural gas are not very abundant, they will run out eventually.This can allow the firms to raise the prices really high under the excuse that it is really rare. This is what governement regulation is for. Governements install price ceilings in order to ensure that the public still has reasonable access to the product, as well as to ensure allocative efficiency which in a monopolistic market cannot be achieved because the firms would have the prices set so the MC=MR which is not the most efficient allcation of resources.

    2.Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    It might result in lower prices in the long-run, because once the monopoly starts creating super-normal profits, more firms will start joining in the competition, and with the increase in competiton, the prices will have to eventually lower again. So in this sense, it might be beter to let the monopolies be for a while, becuase eventually, they will dissapear with the appearance of new competition.

  121. Nadiya Son 20 Feb 2012 at 4:48 am

    Hey Catherine :)
    I really like the way you organized your answer…it is really easy to follow. As well, in this case, a monopoly might be even more harmful, because the firm can make the statement that natural gas is rare and that it will run out soon, and thus people will be alright with paying more, however it is not okay to over charge people to an extent that causes allocative inefficiency.

  122. Sebastian VWon 21 Feb 2012 at 2:19 pm

    1.Why do governments regulate the prices in industries such as natural gas and electricity?

    Because the markets for natural gas and electricity have so many consumers, only the really big companies get to supply. Therefore, naturally monopolies arise. If the government wouldn't regulate the prices by setting a price ceiling, the companies supplying would just raise the price to maximize profits, since in this 21st century world electricity and natural gas are becoming necessities.

    2.Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    Because a de-regulation of the electricity industry would result in more smaller firms joining the market, and on the long-run, these would lower the price, which has a result of changing the profit maximization of the big firms to a natural profit for all the firms.

  123. Debbie Pon 12 Mar 2012 at 9:37 am

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    The main reason governments regulate the prices in industries like natural gases and electricity is to prevent monopoly to rise. Since these industries tend to have a huge amount of consumers, the government will stop huge firms from growing bigger and allow more competition where it is feasible and provides structure that will improve the efficiency of the industry. Not only that, but if the government does not take control, the huge firms will try to maximize their profits and set really high prices for consumers.

  124. Debbie Pon 12 Mar 2012 at 9:38 am

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    A state government think that de-regulation of the electricity industry might eventually result in lower prices because through de-regulation, new firms are drawn into the industry seeking for an opportunity to earn profit. And as new firms are drawn into the industry, more competition is created, causing all firms to lower their prices. Thus, supernormal profits will no longer exist and firms will only earn normal profits. And in the long run, firms will set lower prices to be more competitive as it becomes more appealing for consumers.

  125. Debbie Pon 12 Mar 2012 at 9:48 am

    Hi Sebastian,
    I totally agree with your answers. I do believe that industries will raise their prices just to maximize profits in such industries, therefore government has to regulate and prevent monopolies from arising. And I do believe that natural gas and electricity are the 21st century necessities, therefore the industries could then take advantage of this characteristic and raise their prices even higher.

  126. [...] After watching this lesson, read and respond to the discussion questions for the following blog post:  Monopoly prices – to regulate or not to regulate, that is the question! [...]

  127. Mirren Mecathumon 28 Mar 2012 at 2:04 am

    1.Why do governments regulate the prices in industries such as natural gas and electricity?
    The very word “natural” in the question represents a resource that will eventually diminish. Therefore, they are scarce and a necessity as there is no substitute for it. This was cause the increase in price. If such a situation occurs, some citizens would not be able to afford a necessity and that government cannot allow for that to happen. Therefore, they have to step in and take charge by implementing a price ceiling. By doing so, allocative efficiency will be achieved.

    2.Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    Without regulation on prices, the monopoly firm will start earning supernormal profit. This is the result of lower prices in the long run and the rational behavior of firms would be to enter the market as this is an opportunity firms can take advantage of. The extra competition causes the amount of profit made to drop from profit maximization to normal profit. The presence of competition will cause prices to decrease further. As such, consumers will be at the benefiting end.

  128. Mirren Mecathumon 28 Mar 2012 at 2:06 am

    Hi Sebastion,
    I share the same views. In the 21st century, the need for electricity and natural gas is practically essential. I have to add that they will eventually diminish and have no substitute, which are all factors in determining the price of a product.

  129. Dorothyon 16 Jun 2012 at 9:14 am

    sorry guys, i want to ask a quesion. Isn't Natural Monopoly usually required high infrastructure costs that set a higher barriers to entry, reduce the number of firms to enter into the particular industry regardless what the earning will be, firms cannot afford the large fixed cost to enter in the first place. Therefore, isnt regulate is more the option than deregulate? I got an economic exam on monday so glad that i came across to this website haha. Cheers

  130. hteohon 13 Feb 2013 at 11:20 am

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    Natural gas and electricity are scarce and there is no substitute for it. It is a necessity in people’s lives now. Governments regulate the prices in industries such as natural gas and electricity to prevent monopoly to rise. If we think about it, monopolies will surely set the prices higher in order to earn more profits. Since natural gas and electricity are price inelastic, consumers are insensitive to price changes so monopolies tend to set prices higher since they know that consumers will still have to pay for it. So, governments can stop huge firms from growing bigger to maximize profits and take control of the resources. Since monopolies are profit-maximizing, they tend to produce at a quantity where MC=MR, which means lower quantity of the good/service and a higher price which would make it allocatively or productively efficient, and resources are underallocated as well. The government may choose to set a price ceiling for electricity at the level where the price equals the firm’s marginal cost, which will be below the firm’s average total cost. However, this may result in losses for the firm and may lead to shut down. So what the government can do, which they have done in the past as stated in the article, is to set a price ceiling where the price equals to the firm’s average total cost. This means the firm will breakeven, and earn only a normal profit.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    A state government would think that de-regulation of the electricity industry might eventually result in lower price in the long-run because the theory states that monopolists will be able to set higher prices and earn an economic profit, which will attract more and more firms into the industry which may create competition and will eventually drive down prices in the long-run. However in reality it has been proven wrong because the economies of scale in this naturally monopolistic market have led to increased costs as new firms try to enter the market, which drives prices higher than before.

  131. hteohon 13 Feb 2013 at 11:29 am

    Hi #Mirren Mecathum,

    Good answers! I agree with you that without government regulation on prices, the monopoly firm will start earning economic profit. This will attract many firms in entering the industry hence increasing competition. I do agree with you that consumers will be benefiting at the end because prices will drop so much due to competition, which is why government should take control of the market so businesses would not lose out on their profits too.

  132. Sasha_Son 13 Feb 2013 at 2:22 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?
    Natural gas is a very limited resource, and it is also a very inelastic product for consumers as most have not decided to jump to electric vehicles. In a monopolistic, or in the case provided, naturally monopolistic industry, the firm that controls the industry will sell electricity at a price that most people cannot afford, at an amount that is not enough. It is not efficient in this way. Producing at a level where marginal revenue is equal to marginal cost is being allocatively inefficient. All of this considered, governments probably need to put price limits in order to force the monopolistic firm back into efficiency, in order to help keep the business together, and to make sure market failure does not occur. Market failure is a primary concern here. Another distinct possibility of inhibiting a firm’s abnormal profiting is their shutting down, as closing down their source of profit through price ceilings leads to losses, which is a big problem.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    De-regulation may result in lower prices simply because it ends up creating greater economic profit, which promotes the profitability of the firms. This means that competition is more attractive, and firms enter the industry with the intent of competing. This dilutes the monopolistic environment of before and creates a situation where the firm that was once monopolistic now earns what can be considered socially optimal, benefitting consumers and producers equally and riving them to be productively efficient.

    Nice picking and choosing from the initial post, Michelle. You picked up the concepts and tied them in really nicely, and seeing as I did the same, I do not really have much of a complaint with your answer. I do wonder, though, if you think there is a situation where the presumption made by the government in Question 2 could possibly occur?

  133. Paul Jeffrieson 13 Feb 2013 at 5:29 pm

    Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments regulate the prices in industries such as natural gas and electricity because the market for such utilities is a highly monopolistic one, in which natural monopolies dominate. At the same time, we as a public hold the perception that access to utilities is almost a necessity of sorts, I mean imagine for just a second life without electricity and gas… it would be a horrible existence compared to what most have right now. As such, even though the public recognized that the such utilities cannot be free, they still want to not break the bank so to speak, when it comes to paying for heating and electricity. This is where the government comes in. Economists realize that utilities are highly inelastic in terms of their demand, and it is quite possible that without government intervention, a utility might try to capitalize on this inelasticity by charing exorbitant prices for their services. The government recognizes this and knows that in order to foster a productive, happy, safe, and prosperous populous, access to utilities should be affordable. It is for this reason that the government regulates the prices in the utility-related industries, in order to prevent the monopolies from taken advantage of the consumer’s reliance of the service they provide.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    A state government might think this would work because with the regulations lifted, the monopolies would try to ramp up their prices as high as they possibly could. This would, in turn, annoy customers and push them to the point of leaving their supplying company, and looking for alternative providers of their utilities. This huge differential in between what it actually costs to produce the utilities and what the monopolies are selling them for would lower or at least significantly decrease the power of the barriers to entry in the market, allowing for more competition which would lead to lower prices in general after the market has time to adjust to the drastic changes that have taken place. The problem with this theory is one of structural integrity, as one must remember the complex way in which a utility company functions. All of the piping / infrastructure that must be put into place takes a LONG TIME to complete and polish off completely, which would mean that from the point of view of the consumer, such competition might not be for the best, because while the prices might be lower for a short while, the previously well organized utility related infrastructure would transform into a hyper-complex web of competing pipelines which would tear up roads and end up potentially costing more money to the public (for installation and such) than it would benefit them.

  134. Paul Jeffrieson 13 Feb 2013 at 6:00 pm

    To # Mirren Mecathum

    I really liked how you brought up the finite nature of the resources that we have, which leads them to be so highly inelastic when it comes to their PED. I also like how you brought up the connection between the government instituted price regulation and allocative efficiency, as the government’s intervention in this case is all centered around / done in the hopes of helping the consumer.

  135. xhuanfon 15 Feb 2013 at 5:07 am

    Why do governments regulate the prices in industries such as natural gas and electricity?

    Markets of industries such as natural gas and electricity are natural monopolies. Because the economies of scale are very significant in size in ‘natural monopolies’, it is likely that only one firm will survive in each of these industries. Imagine three companies providing water to your house. Two of them will not be able to make profit and leave the industry. As result, these firms will become monopolists. In monopoly marginal cost is lower than the average cost i.e. the demand. Therefore, when the monopolist is producing at profit maximization level where MC=MR, the price will be higher than MC. And since MC=AR is the allocative efficiency level, if MR is lower than AR, then if MC=MR then MC will be smaller than AR. So the firms in natural monopolies are not producing at allocative efficiency level, which harm public interest and community surplus. Therefore the prices in industries such as natural gas and electricity the price will be too high that most people can’t afford, it is not efficient. That is why governments need to regulate prices in industries such as gas and electricity.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    The state government is thinking that deregulation will allow high profit in the industry. This profit attracts more company to enter the industry, increasing supply and driving the price down. And since there are more companies in the industry, the firms be more competitive and more efficient. This situation is good for both producers and consumers. However, this will not work which is already proven by facts. This will not even work out theoretically. The monopolists are able to set barriers to entry. When the new firm is attracted to enter the industry, it will start with a relatively small size. Compared to the giant firm which is already in the industry, this new firm will experience less economies of scale and therefore, will have a higher average cost. Their price will be higher than the monopolist’s and they will not be able to get the market. So the new firm can’t make profit and eventually will leave the industry. As we said earlier, these industries are natural monopolies—-only one firm is allowed to survive. The situation of multiple firms driving the price down, which was the state government hoped, will never happen.

  136. xhuanfon 15 Feb 2013 at 5:18 am

    Paul Jeffries

    I really liked your comment. But for question 2, I don’t think the consumers have the choice to choose another company, since there is only one. For example in one area there is only one company providing water. No matter how expensive it is, the citizens have to use water from this company as long as they live here. And I don’t think most people will move to another city just for cheaper water. The reason the price might drop down is more companies attracted by high profit might enter the industry and drive the price down. But before that consumers don’t have other choice.

  137. skangon 16 Feb 2013 at 2:47 am

    Why do governments regulate the prices in industries such as natural gas and electricity?
    1. Natural gas and electricity are necessities to life. If homes are unable to afford natural gas and electricity, then they are unable to survive. Thus, the government, in the interest of the people, must regulate prices in such industries. Otherwise, public sentiment would go down and people would begin to rebel under the government.
    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    2. If they do not regulate the prices, then there would be fewer people that would be able to afford it. As a result, the demand would go down, and the prices would be forced down as well.

  138. skangon 16 Feb 2013 at 2:49 am

    #xhuanf
    I agree, these products are natural monopolies and need to be regulated. They have such large economies of scale that there are many barriers to entry.

  139. doan hai vanon 16 Feb 2013 at 8:25 am

    1. Why do governments regulate the prices in industries such as natural gas and electricity?
    Natural gas and electricity are also necessary goods and services in human every day life and in the production of other goods and services. Thus these items should be in great supply and at an affordable price for majority of population. Mostly, the gas and electricity industries fall into the hand of monopoly because the fixed cost paid only for capital goods and lands is extremely high that only one firm can afford and experience economies of scale in the long run. However, there is no guarantee that the resource is well allocated. A monopoly produces output in a much lower level than the level of demand. In pure perfect competition, the price of goods and service is set at the level where MC = MR, that is firms are able to make normal profit. But monopoly takes advantage of their dominant position to charge consumers price above AR in order to earn abnormal profit. If government regulates the price, this forces firms to raise output and work more efficiently to maintain revenue without making any loss. Moreover, consumers benefits from cheap-price products. Especially, people in low income are able to afford basic goods and services like gas and electricity.
    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    Regulation on price might help reduce the price of goods and services at first. But this means company would make a loss in the production therefore they may choose to leave the industry. Moreover, price-ceiling set on products means to put on barriers for new firms to enter the market. That is government makes the uncompetitive atmosphere in monopoly get worse. In order to keep the price low and stable in the long run, government has to get rid of regulation and price barriers. New firms can have chances to enter the market and stir up the competition. Thus competition results in lower price as firms try to attract demand with cheap products.

  140. doan hai vanon 16 Feb 2013 at 9:02 am

    Hi Sasha_S
    It is true when you pointed out that natural gas is limited resource therefore its supply is inelastic. Therefore if there is any upward shift in demand, there is be a small increase in quantity supply but a significant rise in selling price. However, I think this is the nature of the market, it may not relate to the inefficiency of resource allocation in monopoly. To my own opinion, I think that because of the necessity of natural gas in human every day life, government thinks any inefficiency in allocating resource is unacceptable. That why price ceiling is set. I really enjoy reading your answer because they are clear and detailed, there are information which are very interesting.

  141. aleeon 16 Feb 2013 at 7:45 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?
    Governments regulate the prices of natural monopolistic industries because they will produce at the profit maximizing level, not at the allocative efficient level. The industry will produce at the level of output at which profit is maximized, where marginal cost equals marginal revenue. The marginal revenue, however, is less than the price at this point. This will lead to allocative inefficiency because marginal cost is less than the price.

    2. Why would a state government think that deregulation of the electricity industry might eventually result in lower prices in the long-run?
    State governments thought that if price ceilings were removed and firms were allowed to make abnormal profits, new firms will enter the industry in hopes to make profit themselves. This will shift the supply curve to the right, which makes price go down until equilibrium is reached.

  142. aleeon 16 Feb 2013 at 7:52 pm

    Hello # doan hai van. The article stated that deregulation of the electricity industry led to higher prices. The government should enforce regulation and price barriers, not remove them.

  143. kkozlovskison 16 Feb 2013 at 9:25 pm

    I think that the government regulates the prices because everybody has to able to pay for the gas and electrocoty. If the prices would be too high then the poorer families couldn’t afford to pay the bills. And the purpose of government is to make everybody’s lifes easier. So I believe that government needs to regulate the prices, so that the lower classes could also pay the bills on time. Even if the companies wpold find an ideal price, the government would come up with a better option, because government can oversee al the market whereas no firm can do it. Government just tries to do everything so that everyone would benefit, both the producers and consumers.
    De-regulation could open the market for new companies and in this way increase the suuply, thus decreasinf the price for electricity. For example the government could do something so that the market opens for new green producers, in this way they could lower the price aswell as the amount of emissions produced when producing it. But we see that this concept doesn’t work, so we can say that there’s no point of de-regulating the electricity market. Everything that the government changes has it’s effect on the whole market, so if it changes one segment of the market, somewhere else it would also change, it’s like a chain reaction.

  144. kkozlovskison 16 Feb 2013 at 9:42 pm

    # alee
    I agree with your opinion the government sets the price at a certain level. I also think that the reaon is that they see that the firm is producing at it’s best point, but the company should produce at the level where it’s best for both sides, so that’s why it does that. I really liked your answer to these questions.

  145. tleeon 17 Feb 2013 at 7:13 am

    1.Why do governments regulate the prices in industries such as natural gas and electricity?
    Government regulate the prices in natural gas and electricity industries because these firms produce products that are necessities. These are products that (in this modern day society) you cannot live without. The government is aware of this. If the government were to let this market be free, monopolies will form. Then the monopolies will fix up their prices in order to maximize their profits, because monopolies do not care about productive or allocative efficiency. Since there will be no alternatives, the consumers are forced to pay very high prices for natural gas and electricity which will destroy the economy.
    2.Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    If there is a de-regulation of the electricity industry, this means that the government will take out price ceilings and other barriers on the industry. If these barriers are gone, this will give an opportunity for new firms to enter the market. If more firms enter the market, this can bring more competition into the industry, thus lowering the prices for electricity in the long run.

  146. tleeon 17 Feb 2013 at 7:18 am

    # kkozlovskis
    I really liked your approach to the second question. It was sort of the opposite of what I thought about the effects that deregulating the industry would have on the market.

  147. akimon 17 Feb 2013 at 7:28 am

    1. Why do governments regulate the prices in industries such as natural gas and electricity?
    The reason why governments regulate the price in industries such as natural gas and electricity is so that it is affordable to everyone. Let’s say that industries such as those aren’t regulated and eventually become a monopoly. The company that has control over the monopoly will eventually limit the output. Why would the company do this? The company will do whatever it takes to increase its marginal revenue. Once they limit the output, the price of gas and electricity will rise so only people that can afford it will able to get gas and electricity.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    Once the government de-regulates the electric industry, there is no price limit of that product thus allowing other firms to join the electric industry. As other companies see the abnormal profit that they can earn once they join the electricity industry, they’ll want to join. As more companies join, it will increase the competition thus, lowering the price for it.

  148. akimon 17 Feb 2013 at 7:31 am

    #tlee
    Hey tlee!
    I like how you mentioned price ceiling for number 2. Once the government de-regulates the electric industry, the price ceiling will be gone. In other words, the price limit that the government imposed on will be gone. Once the price ceiling is gone, it allows new firms to join thus, increasing its competition which will then lower the price for electricity in the long run.

  149. lannison 17 Feb 2013 at 8:38 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?
    Both industries tend to be dominated or solely run by only one single firm, thus a monopoly. As the monopoly wants to produce at a profit maximizing level, this will create less quantity being supplied and at higher prices. By regulating these industries, we can ensure that the consumer is not being exploited and cheated out of their money. We can also ensure that people who could not previously afford the good can now indulge in the amazing things they have to offer.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    By de-regulating the industry, the firm will begin to gain more profits. Because of this, other firms will want to join the industry in the hopes that they too will gain huge profits. This begins to drive the price down and benefits the consumer.

  150. lannison 17 Feb 2013 at 8:41 pm

    #alee

    The industry may not end up at the point of equilibrium since there is still such a huge firm that is in the industry. I also find this approach to the problem not very effective since we have learned in past cases that it is difficult for smaller firms to enter an industry that is already dominated by a single firm since all the larger firm has to do is lower their price for a time being and kick out the intruding firm.

  151. clundon 17 Feb 2013 at 8:45 pm

    Why do governments regulate the prices in industries such as natural gas and electricity?
    -Because of the monopolistic firms is allocative inefficient when it produces at it maximum profit level (MC=MR): output is too low for social optimum and the price is too high. But since the whole society needs energy the government has to regulate the price so everyone can afford it to make the society go around, and so they’ll produce enough for what is needed.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    -De-regulation means that the government will remove price ceilings or other price barriers that it has imposed on the market. This will make it more attractive for other firms to enter the market especially because of it’s abnormal profit. This can develop the industry more and decrease the price, because of the competition between the firms.

  152. clundon 17 Feb 2013 at 9:03 pm

    #skang
    You said that “If they do not regulate the prices, then there would be fewer people that would be able to afford it. As a result, the demand would go down, and the prices would be forced down as well.”
    I agree with you that if the price isn’t regulate it logically would mean that price would go up since the firm would want to sell the gas or electricity at the point where marginal revenue is equal to marginal cost, so why do you think it might eventually result in lower prices in the long-run? There would then be less people who would be able to afford the electricity, but there won’t be a move in the demand curve but a movement along it, and this doesn’t forces the price down, it is a result of price going up.

  153. Yada Pruksachatkunon 18 Feb 2013 at 2:28 am

    Why do governments regulate the prices in industries such as natural gas and electricity?

    Many people have already mentioned that monopolists are very allocatively and productively inefficient. Governments regulate the prices in industrie such as natural gas and electricity not because it does not benefit the firm when it comes to allocative and productive efficiency necessarily, but because high, monopolistic prices creates less consumer surplus (or none at all), and is less conducive to society than lower prices. Regulating the prices will also help foster a more friendly environment for new, smaller firms, and create more of a perfect competition model. The perfect competiiton model benefits smaller firms and society more than monopolistic industries, which mostly benefit the monopolist, and therefore it is in government’s best interests to keep not only the monopolist happy, but also society.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    State governments believe that the de-regulation of electricity will result in lower prices in the long-run because the abnormal profits gained by the monopolist would draw other, smaller firms to join. Then, as more firms join, the economic power of the monopolist would lower (as there are now more substitutes to the product), and the price will lower.
    However, the flaw to this theory is that it is relying on assumptions of perfect competition (perfect knowledge) without acknowledging the barriers of entry in monopolies.

  154. Yada Pruksachatkunon 18 Feb 2013 at 2:38 am

    #skang and #clund

    I see where you are going with the second question response.Even though the logic of de-regulating governments is valid, I think they draw in perfect competition assumptions into the monopolistic electricity industry, which makes the theory ineffective.

    On the topic of less demand resulting in lower price, I would have to agree with #clund. Even though there will be less people buying the product, the amount of money paid by the rich would make up for that lost money. Also, electricity is a necessity, so the monopolist can sell the product for high price without a significant drop in demand.

  155. m2keoon 18 Feb 2013 at 2:25 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?
    Natural gas and electricity are in a way considered to be our necessities now, as these things do exist in our daily lives and we use them pretty much all the time. Therefore they both have inelastic demand, meaning that the consumers are not very responsive to price change. However, natural gas and electricity are becoming scarcer today because it is limited and humans are constantly using these as part of our daily lives. Governments regulate the prices in industries such as natural gas and electricity to protect from consumers from the high prices that might be set by the monopolies because they have the ability to do so to maximize their profits. When monopolies are profit maximizing, they tend to produce at the level where their marginal revenue is equal to their marginal cost, which means higher price and lower quantity that will make it allocatively inefficient. Governments might choose to regulate the prices in industries such as natural gas and electricity by setting price ceiling at the level where the price equals the firm’s marginal cost. However, this will likely be below the firm’s average total cost, which leads to a scenario that result in losses for the firm, and may lead it to shut down altogether. So in the past, most governments instead will set a price ceiling where the price is equal to the firm’s average total cost, which means the firm will break even, earning only a normal profit.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    A state government would think that de-regulation of the electricity industry might eventually result in lower prices in the long-run because this idea of de-regulation is that removing price ceilings would lead to an increase in economic profits for the firms, which then attract new firms into the market. This means more competition that should then drive prices down towards the socially optimal price, which would be beneficial for the consumers and producers by forcing them to be more productively efficient in order to compete. However as mentioned in the article, this was not the case because in natural monopoly market, more competition means higher cost of production, which eventually drives prices up even higher than before.

  156. m2keoon 18 Feb 2013 at 2:25 pm

    # xhuanf

    Hey there. Great response. I really liked how you connect the idea of monopoly to economies of scale in the second question. I do agree with you that theoretically, the monopolists are able to set barriers to entry meaning that they can somehow control firms entering the industry. As you’ve mentioned, the new smaller firms will experience smaller economies of scale compared to the existing firm in the industry and thus having a higher average cost which means higher price compared to the existing firm that is benefitting on a large economies of scale with lower price. This will be unattractive to consumers who prefer the lower price of course so eventually the smaller firms will be force out of the industry due to losses. Therefore the idea of de-regulation, which should lead to more competitions driving down the price will not happen

  157. Malen Kon 18 Feb 2013 at 3:03 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?
    Governments regulate the prices in industries such as natural gas and electricity because these are resources that are necessary in people’s lives and often there are no close substitutes. In monopoly, the producers will limit their output and provide their product at a higher price in order to gain higher profits. In this case, not enough natural gas or electricity is produced and the price will be to high for some consumers to afford therefore the governments need to intervene by setting a price ceiling etc. Price ceiling however should be set at where price is equal to firm’s average total cost and not at where price equals the firm’s marginal cost because it might negatively impact the firm as it may result in losses or lower profits. If the government set the price ceiling where the price is equal to the firm’s average total cost, then this mean that the firm will be breakeven and earning only a normal profit therefore they would be satisfied as they are able to cover their costs.
    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    A state government would think that de-regulation of the electricity industry might eventually result in lower prices in the long-run because monopolists will often limits their output and charge at a higher price to earn an economic profit as they are the industry itself. This economic profit will attract more firms into the industry, which will create more competition between the firms. Prices will often be pushed down as firms compete for more consumers in the long run. However, this theory is not correct because economies of scales in natural monopolistic market will lead to increased costs as new firms enter the market as resources are now shared among these firms, which will eventually drive prices up.

  158. Malen Kon 18 Feb 2013 at 3:04 pm

    # doan hai van

    Hey Hai Van, I definitely agree that when the government get rid of regulation and price barriers, new firms will have more opportunities to enter the industry which will create more competition. However, natural monopolies benefit more from being a single monopoly and benefitting from economies of scale, if new firms are competing against it, this will result in higher costs for all firms in that industry which will eventually cause price to go up.

  159. msurninon 18 Feb 2013 at 3:15 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    These types of monopolies are called natural monopolies. Due to high barriers to entry such as large start-up costs and production costs, it makes sense for only one firm to participate. This firm is likely to become a monopolist (the only firm in the industry) unless other firms are willing to enter the industry. Being a monopolist, the firm will produce at profit-maximizing level of output where MC=MR. While this is extremely beneficial to the firm itself, consumers suffer from high prices that the firm charges for lower quantity of output. In this case, governments need to regulate the prices in natural monopolies such as natural gas and electricity, as it wants the right amount of electricity to the right number of people.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    The theory behind this is that deregulation of prices in the electricity industry, for example, will lead to greater abnormal profits of the monopolist company, which should attract new firms to the industry. In this case, the market situation will change from monopoly to perfect competition, which should lead to lower prices as firms will have to compete and lower their prices to the socially-optimum level.
    This is a great idea that some states have actually tested in reality; however, they have not taken into account high barriers to entry inherent to monopoly, which stop the new firms from joining the industry and, in fact, lead to even higher prices for electricity and, therefore, higher profits.

  160. msurninon 18 Feb 2013 at 3:29 pm

    #alee

    Do you think there are any disadvantages to the theory that some governments are trying out? Think about it: they haven’t taken into account that there are high barriers to entry in monopolistic industry (that’s why it is called monopoly – single producer). That means that even though new firms would be willing to join the industry, it will be quite hard for them to pass the high start-up costs – barriers to entry.

  161. ylahhamon 18 Feb 2013 at 4:44 pm

    to protect consumers, because these things are necessities. To force someone to over pay for these items is immoral since consumers have to buy them, and could start to cost so much that it takes a large portion of a persons income. To stop this from happening the government sets regulations on monopolies.

    it could lead to lower prices in the long run, because when companies see these monopolies making profits other firms will try to enter the market, and although there are barriers to entering the market they will eventually find a way past them. when they do, the firms will start to become competitive and therefore prices will start to fall.

  162. ylahhamon 18 Feb 2013 at 4:51 pm

    @tlee nice and thorough answers, i agree with you on all points.

  163. MeganKon 18 Feb 2013 at 5:07 pm

    Why do governments regulate the prices in industries such as natural gas and electricity?
    Because they want to create and equal market where the majority of citizens/the population is able to afford gas and electricity. Without regulations, the majority of monopoly firms would produce a low output, but increase prices, causing the creation of “luxury” items, which is completely contradictory as a necessity item like electricity. This is evident in the electricity markets of US States, where in market regulated states the price of electricity can be up to 37% higher than in regulated states. This causes $48billion in extra costs to companies and families that need this electricity to survive and function in a basic capacity.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    Because they hoped that the act of de-regulating the electricity industry’s market would invite more firms to enter the marketplace, causing a lowering of prices as competitiveness increases. This obviously didn’t happen, and now people are suffering in market regulated states where the companies with large economies of scale are able to inflict brutal prices for a necessity good onto the masses of the state.

  164. MeganKon 18 Feb 2013 at 5:16 pm

    #msurnin

    But sometimes I think that it’s the risk many producers should take (the opportunity cost). It may be hard for them to enter, but in the long run it could have many more benefits than costs. It also allows for much more consumer surplus, which will not only benefit the people, but benefit the CSR of the firm entering the market, as they’ll be seen to grant more to the people and get better reactions from the general population.

  165. ABarrowon 18 Feb 2013 at 5:57 pm

    Governments regulate the prices in industries such as natural gas and electricity because:

    — there is a wide range of output possibilities (because natural goods tend to be inelastic)
    large economies of scale are experienced by these natural monopolies

    and left to their own devices, these natural monopolies would empirically (monopolies lowering their overall output level and raising the prices of their products) result in allocative inefficiency.

    P.S Monopolies are statically inefficient…think about it…

    A state government may think that the de-regulation of the electricity industry might eventually result in lower prices in the long-run because:

    — the tried and tested thought of super-normal profits attracting new entrants into a market, thus increasing competition and consequently lower profits to normal levels should surely apply to the natural monopoly that is the electricity industry, but lo and behold it does not.

  166. ABarrowon 18 Feb 2013 at 6:21 pm

    Dear Judy Chen,

    I would have to point out that in order to maximize profits, firms of inelastic products would not need to lower prices eventually because an inelastic PED means that when price increases, demand will fall by a relatively smaller percentage, eventually leading to an increase in revenue.

    Sincerely,

    Amadou L. Barrow

  167. rkangon 18 Feb 2013 at 7:53 pm

    Why do governments regulate the prices in industries such as natural gas and electricity?
    – Governments tend to regulate the prices of industries such as electricity and natural gas because these products are considered as necessities. It would be a bad move to just ignore these increase in prices because the consumers would then file complaints to the government. A good government should always be thinking of consumers satisfaction to prevent riots and strikes from happening. It is a smart move for governments to regulate the prices of necessities. Governments are less inclined to regulate the prices of luxury cars like Bentley because they are naturally expensive. The government knows that there is such a limited pool of people that actually buy these luxury cars. So an increase in price will not do much because the people that buy Bentley cars are already wealthy enough to withstand the price increase.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    – If these electric industries are able to freely increase their price for their provision of electricity, they may experience short run abnormal profits. But, because there is a great abnormal profit during the short run, other people would want to join the industry because they will be making good money. As more firms enter the market, the supply of electricity providers will increase. This will drop the cost of electricity and can even bring in normal profits or losses in the long run.

  168. rkangon 18 Feb 2013 at 8:06 pm

    #MeganK

    The numbers you have provided of 48$ billion of extra costs for electricity opened up my eyes as to how much money is being handled. Since the government deals with billions of dollars, it is very important for them to make the right decisions on government intervention of subsidies and even monopoly regulations. One wrong move can cause a turmoil of billions of dollars down the drain.

  169. deborahs56on 18 Feb 2013 at 9:16 pm

    1)Why do governments regulate the prices in industries such as natural gas and electricity?
    Governments regulate the prices in industries such as natural gas and electricity because these firms are what is known as natural monopolies. As natural monopolies, the firms produce at an not allocative productive level. They not only provide less but increase the price. As a result, consumers are paying higher prices and are not getting enough supply as is demanded. Natural monopolies produce at where MC=0 because at that point they receive maximum profit.
    2)Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    It was theorized that a de-regulation of the electricity industry would result in abnormal profit and the abnormal profit would attract other firms. As more firms enter the market,the overall price of the product would than fall. However , the theory was incomplete. The economies of scale ended up as to big of a barrier to other firms. As a result, the monopoly was able to charge at a higher price with even lower quantity.

  170. avonwendorffon 18 Feb 2013 at 9:38 pm

    Why do governments regulate the prices in industries such as natural gas and electricity?
    Governments are created in order to fulfill the needs of their people. In order to due so, they must step in if companies are charging too high a price for necessities. Monopolies will produce at allocative inefficiency. The government aims to stop this by regulating the firm and imposing a price. However, the government must also stay faire to the firm, so it creates a price where the firm will have a normal profit.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    States wanted to remove the price ceiling in order to increase profits for the company. They hopes that this increased revenue will then make more companies rush into the industry and create a competitive market. This would then cause competitive behavior and drive the price down to a socially optimal price.

    Anna

  171. avonwendorffon 18 Feb 2013 at 9:43 pm

    Hi # rkang,

    I thought you did a good job pointing out that the government is cautious before regulating monoploy. I agree that products that are necessity need government regulations, after all, that is what a government is supposed to do – look after its citizens.

    I am always surprised the the government allows monopolies in the cases of patents with medicine because this monopoly stops many people from receiving the product which they may desperately need.

  172. david.yooon 19 Feb 2013 at 4:31 am

    The governments regulate the prices in industries such as natural gas and electricity because they are natural monopolies and allocative inefficiency. The monopoly firms has the full control of setting the price of their products, which means that they can maximize their profits and this won’t be fair to other firms that are trying to get into this market. However, the monopolist’s profit maximizing price and output doesn’t equal to Marginal cost and so the resources are under-allocated and this is why the governments should regulate the prices in those industries. By the help of governments, those industries can produce their products more efficiently.

    The state government think that de-regulation of the electricity industry might eventually lower the price in the long run because then the electricity firms would set the price much higher and make lots of profits and this will finally attract the new firms into the industry which increase the competition among the firms and they will eventually lower the cost of the products. In the end, the firms will keep lower the price to attract the consumers and this will lead to the price where the allocative efficiency happens.

  173. david.yooon 19 Feb 2013 at 4:38 am

    # MeganK

    I agree with your points, the regulation is to create the equal market and without the regulation the majority of monopoly firms would produce a low output but increase the prices. Also, it was interesting that $48 biilion in extra costs to companies and families that need this electricity to survive and function in a basic capacity. Lastly, of course if other firms come into the industry, it will lower the price in the long run as many firms will lower their prices in order to attract the consumers.

  174. kmingeeon 19 Feb 2013 at 6:53 am

    1. Like the article says, an electricity company with a monopoly will create its price and output decision based on profit maximization. In order to do this, the company will raise its price in order to make MR = MC. When they do this, the price will be too high for some consumers.
    2. By removing the price ceiling, the firms would be able to gain economic profits. This would attract new firms to enter the market which in the long-run would bring the price down. This would not only benefit the consumers but also the producer because it would force the producer to improve in terms of productive and allocative efficiency.

  175. kmingeeon 19 Feb 2013 at 7:38 am

    #david.yoo

    Your answers are very detailed!
    I agree with you that in the long-run the price will go down. You explained how in the end, the firms will lower the prices, leading to allocative efficiency.
    I think that while setting a price ceiling will solve the problem of high prices to begin with, letting the price go down in the long-run will bring more firms into the market, preventing a monopoly.

  176. bdesslegnon 19 Feb 2013 at 11:53 am

    mm

  177. bdesslegnon 19 Feb 2013 at 12:48 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    The need to regulate prices comes from the mere fact that monopolies can provide products at a higher price with a lower quantity and still get away with it. Governments need, in this case, to make sure that consumers don’t suffer greatly. Even though the government can’t assure for a proper allocation of resources completely, it can regulate the monopoly so that it will sell at a point where TR=TC. This will mean that the firm will be able to function at normal profit and more quantity will be provided at a lower price.
    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    De- regulation of the electricity industry from a certain state’s perspective might lead to lower prices in the long- run. This reason might be that ,the state will assume that, if monopolies are allowed to have freedom in the price they sell their products at then the excess demand and the abnormal profit will attract other firms to join the industry, thus shifting the supply curve to the right. However, in reality price isn’t going down as the states have wished.

  178. bdesslegnon 19 Feb 2013 at 12:52 pm

    # deborahs56
    I agree with your answer for the most part, but I am unsure about the analysis you made about firms being unable to enter the firms because of barriers

  179. jaimejaime8on 19 Feb 2013 at 1:29 pm

    Governments need to regulate firms such as gas and electricity because they will always be monopolies (natural monopolies). Therefore they have the full control over the industry and need tough regulation in order to protect consumers, since such products are also necessities. With the extra sustain of the government, these firms can be more efficient thus benefiting the consumers.

    A de-regulation in such companies would highly raise the possible profits for a certain time period, this would attract other firms into the industry thus balancing the market out through perfect competition. A the end the market would turn efficient.

  180. dtumanavarroon 19 Feb 2013 at 2:51 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?
    Natural gas and electricity industries are usually labeled as natural monopoly industries because it’s only necessary and logical to have a low amount of providers in the industry. Being a monopoly, the electricity firm may decide to produce at it’s profit maximizing level of output where MC=MR. The issue with this is that at this level they are not producing at the socially or productively optimum level. They are restraining their output and raising their prices and consequently less consumers have access to electricity. Because of this, governments have to regulate the economy, but in such a way that the monopoly won’t start to lose money and leave the industry, which is located AC=MC (the point where they break even)
    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    State governments theorized that by deregulating a monopoly and allowing it to charge high prices, other firms would be attracted by the abnormal profits and will attempt to enter the industry. By entering the industry the firms would be creating competition and high chance of price competition which would intern lower prices in the long run.

  181. dtumanavarroon 19 Feb 2013 at 3:09 pm

    Hi #jaimejaime8,
    I agree with your two points, but this could be because there is little to differentiate from in this case. The last point you made in question one did confuse me a little bit. You said that “With the sustain of the government, these firms can be more efficient thus benefiting the consumers.” what did you mean by the ‘sustain’? One last thin that I realized when reading your response to question two, I think it’s also important to acknowledge the fact that this idea is only theoretical and to my knowledge hasn’t worked yet in real life situations. Thanks!

  182. Mkhosoon 19 Feb 2013 at 4:12 pm

    Why do governments regulate the prices in industries such as natural gas and electricity?

    Industries such as natural gas and electricity are industries in which natural monopolies form due to large economies of scale. However, monopolies tend to produce too little at too high a cost for society, they are allocatively inefficient. This is due to the face that monopolies, like all firms, will try to produce at the profit-maximising output level, where MR = MC. The difference is however, that monopolies have the market power and clout to make this happen. Governments thus regulate in order to either breakup monopoly power (through anti-trust laws) or to ensure that monopolies produce at the socially optimum level.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    This government believed that deregulation through the removal of price ceilings would allow greater economic profits, or in other words, allow firms to enjoy supernormal profits in the short-term Now, this supernormal profit, in theory, would attract other firms to this industry, increasing competition which eventually would lead to a reduction in prices and an achievement of the socially optimum level of output. In addition, in theory this would lead to all firms enjoying normal profit in the long-run.

  183. Mkhosoon 19 Feb 2013 at 4:16 pm

    @bdesslegn

    Does paying more really mean the consumers ‘suffer greatly?’ The article mentions how higher electricity prices have the secondary beneficial effects of reducing emissions and encouraging energy conservation. Moreover, this extra profit could be used to fund expensive R&D into green tech and newer and cleaner ways of generating electricity.

  184. amcpikeon 19 Feb 2013 at 4:32 pm

    Why do governments regulate the prices in industries such as natural gas and electricity?

    While most industries regulate themselves, energy companies – as well as many other industries which relate to primary commodities – are often regulated by the government. This is due to infrastructure costs, which often leaves many companies with a monopoly over some communities in terms of energy supply. While it is in the best interests of the monopoly to market their energy at the profit maximizing price, doing so would mean that a great deal of people could not afford power. The government recognizing that electricity is a “need” in modern society, and that there would be detrimental to the economy as a whole if it were to become a luxury good. They can stop this from happening with methods such as price ceilings, etc.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    This is likely because they believe the prospect of supernormal profits would attract competition to the electrical industry, effectively changing it from a monopolistic system to a competitive one. As competition increases the old monopolies would need to drop their prices from the profit maximizing point to the equilibrium price/quantity. This however is a flawed belief, as existing monopolies would likely exhibit anti-competitive behavior and stunt the growth of the potential competitors.

  185. ykim3on 19 Feb 2013 at 4:33 pm

    1.Why do governments regulate the prices in industries such as natural gas and electricity?
    – Natural gas and electricty are very necessary things to live. Therefore, if one monopolist takes over all supply of gas or electricty, it will be too powerful and control the economy very easily. It will be controling the price whenever it wants so the economy cannot work efficiently.

    2.Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    – Maybe, it would expect the perfect competition between other firms. If there is a perfect competition, many firms will enter and price will go down

  186. jyoungon 19 Feb 2013 at 4:38 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments regulate the prices in these industries because natural monopolies are created as in makes the most sense in some cases, and as we now monopolies like to operate at their profit maximizing level of output (MC=MR). This results in allocative inefficiency among other things. These monopolies can under produce while overcharging and governments want to stop this because natural gas, electricity, etc are all very important for consumers and it’s not good if consumers cannot afford them. The government can ensure that all consumers have access to these goods at fair prices.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    Because they might think that when a firm starts making abnormal profits other firms will also enter the industry seeing that opportunity, leading to more competition which will eventually lower prices. However this may not be the case with barriers to entry or sometimes a monopoly is required to benefit from enough economies of scale to bring down prices.

    -jyoung

  187. DBharwanion 19 Feb 2013 at 4:43 pm

    Why do governments regulate the prices in industries such as natural gas and electricity?

    1) Governments regulate prices for industries like gas and electricity because these are necessities and therefore these prices should be low in order for everyone to have access.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    2) State governments may assume that by de-regulating electricity industries may result in lower prices. Abnormal profits could attract new companies to the market.

  188. ykim3on 19 Feb 2013 at 4:44 pm

    @amcpike
    I agree that the electricity industry should be regulated by the government. It is because it is very significant and important.

  189. nwarneron 19 Feb 2013 at 4:45 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?
    Governments regulate the price in industries such as natural gas and electricity as in a monopolist firm they would produce at a level where marginal cost is equal to marginal revenue. For these industries the firms all tend to be monopolistic due to natural monopolies where beneficial economies of scale cause only one large firm in the market. For industries such as natural gas and electricity this occurs at a low demand for the product. Therefore, the firm would produce less supply than there is demand which would cause a shortage of electricity and higher prices while allowing greater abnormal profits for the firm. Therefore, the government would decide to come in and regulate how much electricity can be sold for by creating a price ceiling. This would in turn cause the firm to produce enough energy to supply everyone at that price.
    2. Why would a state government think that the de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    Many state governments would choose to de-regulate electricity would lead to lower prices in the future. This is caused by their belief that there will be perfect competition. The government knows that if they choose to de-regulate the industry the firm will choose to produce the electricity at low levels of supply and high costs which would cause an inefficient allocation of the electricity. The government hopes that this would lead to a new firm seeing an opportunity to produce and supply electricity for a cheaper cost. They hope that this will cause a more perfect competition as the firms grow and become equal sizes and compete to provide electricity which would be beneficial to the consumer and ensure the most efficient allocation of resources. However, in reality due to the large economies of scale and the large entry costs which form a barrier it is unlikely that other firms will enter the market or be able to have the same low supply costs that the large firm can take advantage of.

  190. nwarneron 19 Feb 2013 at 4:45 pm

    #jyoung
    Nice answers. I like how you go into a great deal of depth when answering the questions and relate them to the concepts that we studied. I also like your use of economic terminology it makes the answer sound knowledgeable.

  191. jyoungon 19 Feb 2013 at 4:47 pm

    Hello, #avonwendorff

    I thought your answers were very good and concise while covering all of the information needed. I liked how you talked specifically about how the removal of price ceilings would have an effect. In the real world though despite the fact government thinks this sounds good a monopoly can still create barriers to entry in an industry.
    -jyoung

  192. Sebastian Changon 19 Feb 2013 at 5:19 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    Governments regulate the prices in industries such as natural gas and electricity due to several reasons.
    Firstly, the demand for natural gas and electricity is demand inelastic (when consumers are not very responsive to price changes) – this is because consumers perceive natural gas and electricity as a necessity, specifically to be used for operating vehicles and lighting respectively. An imposition of a tax would tend to increase the government’s tax revenue, to which would be used to improve infrastructure of the economy such as improving roads and police force (security).
    Secondly, the demand for particular products such as electricity have been increasing and there are some statistical data depicting that in some countries, the demand would eventually surpass the available supply, hence causing a supply deficit (or demand surplus). This is one of the main reasons for the relatively recent establishment of nuclear power plants in various countries.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    As mentioned in the article, it the idea of deregulation of electricity markets (specifically the removal of price ceilings) was to lead to greater economic profits for the electricity firms, which would subsequently attract new firms into the market. This would be followed by the competition for which firm would have the competitive edge of lower prices; a lower price towards the socially-optimal price, benefiting consumers and producers by forcing them to be more productively efficient in order to compete.

  193. amcpikeon 19 Feb 2013 at 5:21 pm

    # Kmingee

    Hey man, I really enjoyed your post, however I have one quick question about your response to number two; Is it realistic that the removal of price ceilings will be enough to get prospective competitors to enter the market? I feel that we can safely assume that existing monopolies will exercise anti-competitive behavior to eradicate any potential competition. However it could in the short run lower prices as existing monopolies wage price wars, though prices would rise again in the long run.

  194. Sebastian Changon 19 Feb 2013 at 5:26 pm

    #Sasha_S

    I agree with your statement that natural gas is a limited resource (or a very scarce good), however you ought to mention that the demand for natural gas is somewhat demand inelastic since it is a substitute good to fossil fuels and the prices of fossil fuels have been becoming more and more expensive as time passes. This is likely one of the reasons why the government had imposed a price ceiling on the prices of natural gas. Overall, a good response Sasha!

  195. cmacleodon 19 Feb 2013 at 5:34 pm

    1.Why do governments regulate the prices in industries such as natural gas and electricity?

    Because natural gas and electricity in this age in time is a great necessity, people need these resources and government can’t allow a firm that provides this resource to charge excessive amounts for it, it would disrupted the economic balance. The main reason why governments regulate prices in industries is to protect the consumer from firms trying to take advantage of their power over the consumer and the consumption of a good.

    2.Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    Because when they are making money, other firms will want to join into that industry because there will be some ways to get through the entry barriers so then it will become more competitive so the prices will have to lower since there is more competition rather than a sole provider.

  196. edubison 19 Feb 2013 at 7:19 pm

    Why do governments regulate the prices in industries such as natural gas and electricity? Governments are often criticized for strict or lax regulations, especially about their impacts in certain industries; specifically the gas and electricity industries are regulated to provide a “balanced” or “fair” market for consumers and buyers alike. Prices in these two industries are regulated for a few reasons mainly concerned with the fact that these markets are usually natural monopolies. Natural monopolies occur in certain industries when there are only enough economies of scale to benefit one firm. Firms that provide electricity or natural gas must provide for nearly all people, as these products are typically used daily, this means prices should be low enough to be available to everyone, but high enough so the firm can earn profits. The prices are regulated in an act by the government to try to keep the balance between these.
    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run? A state government may believe that by de-regulating the electricity industry the prices will decrease over time because this is an opposite of taxing or placing a price ceiling on a monopoly; a price ceiling put on a monopoly, as we learned from this video, only increases price and decreases quantity. Perhaps a state government believed that by de-reguating the electricity industry that the prices will do the opposite and lower, however, we know that a natural monopoly wants to produce at the output when MC = MR at the profit-maximising level of output. This does not produce the quantity wanted by consumers, so prices could increase because demand increases and there is only limited product.

  197. Csabaon 19 Feb 2013 at 8:34 pm

    1) The government would regulate these prices in order to allow every household to have the access to gas and electricity,because these things are necessary to live.

    2) In this case firms would start to make abnormal profits causing to attract other firms, which would try to enter the market. This would lead to a more competitive market and decrease the price.

  198. Csabaon 19 Feb 2013 at 8:40 pm

    @Kmingee

    Great response!
    Just one question. Are you really sure about the fact that by eliminating the price ceiling, other firm would have the opportunity enter the market?

  199. nikolay@pamojaon 19 Feb 2013 at 8:53 pm

    1. governments regulate the price of natural gas and fossil fuels because if they did not it would be provided at a level that benefits the monopoly the most, rather then the people. By regulating these resources the public benefits from lower costs and the monopoly still makes normal profits.

    2. a state or government might think that the abnormal profits that the firms would make in a deregulated industry would attract other firms, and through competition the price would then go down as seen in perfect competition. However this is wrong because we are dealing with a monopoly not a large group of small firms, and as we know monopolies can make abnormal profits indefinitely if sufficient barriers to entry exist.

    @#Csaba
    ha, im glad you pointed that out, that a crucial assumption in the idea that other firms would jump in is that there are no barriers to entry!

    @# cmacleod
    that is a very eloquent way to put it, im glad i stumbled upon your comment and couldn’t have said it better myself

  200. rparsonon 19 Feb 2013 at 10:08 pm

    1. Why do governments regulate the prices in industries such as natural gas and electricity?

    In such industries, companies often charge high prices for power, which can impact both everyday consumers and other businesses. The government often feels a need to lower prices for the benefit of both aforementioned parties.

    2. Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    As deregulation would allow for businesses in the industry to make greater profits, this would in theory incentivize new businesses to enter the market. The increased competition would force prices down in the long term, or force an improvement in service.

  201. rparsonon 19 Feb 2013 at 10:12 pm

    #nwarner,
    Good analysis of the situation, I especially agree with your answer to question two regarding why the policy of deregulation did not work in this industry.

  202. alessiaayoubon 19 Feb 2013 at 11:06 pm

    • Why do governments regulate the prices in industries such as natural gas and electricity?

    1. Governments regulate the prices in industries such as the natural gas and electricity because they are both natural monopolies and are vital for everyday life! The nature of these markets, in which great economies of scale are extended over a wide range of output, leads to a natural monopoly in which the single producer who controls the entire industry is apt to set profit-maximizing price and output. Governments can aid in lowering the income families and provide necessities by regulating price.
    • Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    2. Deregulation of the electricity industry might eventually result in lower prices in the long-run because the theory that de-regulation would leave the electricity firms free to set high prices and earn more profit. It would allow other companies to have no restriction in setting prices that are higher in order to obtain more profit and this will cause consumers to look for other alternatives due to cost.

  203. alessiaayoubon 19 Feb 2013 at 11:11 pm

    # rparson,
    Your answers were well written and easy to understand I liked how you answered the second question. I like that you said it could force them to go down and you gave the alternative of an improvement of service. Well done.

  204. edubison 19 Feb 2013 at 11:32 pm

    #Kmingee & #amcpike
    I agree that the firms will see an increase in profit if the price ceiling is removed, but as #amcpike pointed out, I don’t think that there will be firms flocking to the industry. There will be barriers to entry and I do not see how the market would go from monopoly to perfect competition so smoothly.

  205. jaimejaime8on 20 Feb 2013 at 12:03 am

    rparson

    I see we agree in mostly everything related to regulations and de-regulations of monopolies by the government. I would just like to add to your first answer that in my opinion sometimes government might not have to control monopolies because they themselves chose to increase the price but maybe because the industry is giving some problems that might be not allowing the monopoly all of the economies of scale it could get, thus raising the prices and damaging consumers. Governments would have to interfeer in such situations in order to economically sustain the industry.

  206. bobby con 20 Feb 2013 at 2:52 am

    1-Why do governments regulate the prices in industries such as natural gas and electricity?

    The reason governments regulate the price of industries such as natural gas and electricity is because both are necessary goods; letting companies control the price and demand of these products would lead to a negative effect on consumers. And leaving some without electricity or natural gas would cause much greater issues. It is necessary to keep the supply high and price low enough, so all consumers will have access. If a monopoly were in place, they would set the price high and supply low, to maximise profits. The negative effect.

    2-Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    If you regulate the electricity industry, the price will be lower in the short run, but the company will continue to lose money and end up leaving the industry or shutting down. By taking away the price ceiling and regulations, it becomes easier for other companies to join the industry. By increasing the competition in an industry, the price will theoretically begin to fall.

  207. bobby con 20 Feb 2013 at 2:57 am

    # cmacleodon

    Hi,

    You bring up a good point on the first question. Governments mostly regulate prices in hopes to help out the consumer, and some companies will try and use their power for larger profits. This is especially true with natural gas and electricity as both should be had by everyone.

  208. ghyafilon 20 Feb 2013 at 12:59 pm

    1. Governments are usually the owners of firms in these industries and they are a monopoly on the market. They set price ceilings or price floors.They regulate the prices so customers won’t overuse it, but they also try to set a certain price so everyone can have electricity or gas. Usually the prices rise very quickly as the output increases.
    2. Regulation will see low prices in the short-run but in the long run the firms will lose money as the prices set by the governments might not be at least at the break-even point for the firm therefore loss is made. The deregulation of the industries will make the monopolies set high profit making prices but in the long run different business will try to penetrate the market, and adopt a low price strategy.

  209. ghyafilon 20 Feb 2013 at 1:02 pm

    @Csaba For the first question you could have added that governments can try to set a floor price on these industries so the consumers don’t overuse these quite scarce resources

  210. Jazzyon 20 Feb 2013 at 7:07 pm

    1) You can say that governments are the bosses or the owners of firms in such industries, because they are the monopoly of the market. They are the ones who make the choices of price ceilings or price floors. The reason they set such limitations is because they want to make to sure that the sources or goods are not overused but at the same time that they are affordable to everyone.

    2) If you regualte an industry such as the electricity industry, then in the short-run they will not be making losses, but in the long-run the company will start making losses because of the price ceiling and therefore will be forced to shut down. If the government does not regulate in this industry it makes it easier for other firms to join and therefore there will be higher competition which will eventually bring down the price.

  211. Jazzyon 20 Feb 2013 at 7:10 pm

    Comment to # ghyafil:

    I really like your answers, especially the fact that you included that other firms will be included in the market and will eventually create a low-price strategy. It is something which we see everyday, that people are trying to develop new sources of energy and especially renewable energy.

  212. Javier Granadoson 21 Feb 2013 at 2:32 am

    Why do governments regulate the prices in industries such as natural gas and electricity?
    Governments regulate the prices of such services like natural gas and electricity because
    this is were they get the most money from. I mean, as an example, Qatar would like to lower the price of petroleum as they are one of the major sellers, and if other countries like Oman lower the price of petroleum, then other countries will buy the petroleum to this country. So to make sure that a country doesn’t loose demand, they keep a low price.

  213. Javier Granadoson 21 Feb 2013 at 2:39 am

    #Jazzy
    You’re answer is good, but there is something I don’t agree with. Government are not the bosses o f industries. Yes, they may regulate some of them, but not all. For example, multinationals are not regulated by governments. And this companies (multinationals) are exaactly the ones which cause most monopolies. Still you got some good answers.

  214. ahmadson 21 Feb 2013 at 2:41 am

    1) Why do governments regulate the prices in industries such as natural gas and electricity?
    – Electricity is one of the most important needs for the modern society and almost nothing can be done without it. For the governments to make sure that everyone gets fair access and by fair access I mean an affordable price, they pass regulations that limit firms on how much they can actually charge people for electricity. One of those ways is to have price ceiling so that no firm can charge people more than that. But in most cases, I don’t think it’s works out perfectly because although governments can certainly try to make the life easier for the people by trying to impose price ceiling but since firms such as in electricity business are natural monopolies, and that makes it harder to find a substitute so even price ceiling wouldn’t affect that much.

    2) Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    – Letting the monopolies to go on with their way of doing business and charging people how much ever they want will add to their abnormal profit since they are trying to maximize their profit and not really care about the fact that their service will not be available to everyone thus its an inefficient business model. But the existence of abnormal profit attracts more firms to join the electricity industry in the long-run and certainly once the “natural monopoly” is gone, the market becomes competitive and the prices will be lowered.

  215. ahmadson 21 Feb 2013 at 2:54 am

    Comment to #Jazzy and #Javier Granados.

    Hey guys,

    I wanted to comment on the first two sentences that #Jazzy brought up about how governments are the actual bosses in some monopolies. And Although I see #Javier disagrees but I agree with #Jazz because in some countries they actually do not have “private” monopolies who are in charge of e.g. electricity. For example, in Afghanistan a few years ago the national electricity company was in the hand of the government and the prices were way lower than not a while ago, they privatized the whole firm and now people are getting these really expensive electricity bills. So I would say that in some cases it’s actually for the will of the people if governments are “bosses” in natural monopolies.

  216. Btunceron 22 Feb 2013 at 5:07 pm

    1.Why do governments regulate the prices in industries such as natural gas and electricity?

    Because these goods are among necessary goods their price has to be regulated to prevent very high prices. Since they are inelastic, companies, if not regulated by the government, can increase the prices without affecting their demand so much. Also, gas and electricity providers are not something that the consumer can change to a different one overnight if the competition had lower prices.

    2.Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    In short run, some companies will have a monopoly over the gas and electricity market which would result in higher prices. However, in long term, because of the high profits, more companies will want to join the industry. Because of the high competition environment, the prices will be driven down.

  217. Btunceron 22 Feb 2013 at 5:21 pm

    #ahmads

    Hi. I really enjoyed reading your answers and they were very informative. I like how you mentioned in your first answer that even though the government puts a price ceiling, it may not have a big affect because of the natural monopoly. I agree with you that sometimes the price ceiling may be too high and not have a big affect but a high price ceiling is still better than nothing because at least there would be an end to how much the companies can charge.

  218. jduplessison 22 Feb 2013 at 6:55 pm

    Why do governments regulate the prices in industries such as natural gas and electricity?
    If the government were not to impose a price ceiling on natural gas and electricity the companies would raise the price in order to maximize their profits as that is the goal of a monopoly.
    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?
    Other rival companies would be attracted and they would use penetrative pricing to break into the market. Then since there will be a rivalry the price will go down.

  219. jduplessison 22 Feb 2013 at 6:57 pm

    # Csaba
    I agree that there rivalries when governments stop regulating the price.

  220. jduplessison 22 Feb 2013 at 7:00 pm

    # DBharwani
    I agree.
    I believe that it is the duty of the government to serve the people.

  221. jlamunoon 22 Feb 2013 at 8:46 pm

    Why do governments regulate the prices in industries such as natural gas and electricity?

    Electricity and natural gas are necessities, which means that they are inelastic. Without a regulation in their price companies (who are monopolies) would seek to maximize profit by raising the price exponentially. In turn this would cause a very un-balanced economy

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    Because even though in the short run the profit will be very big, in the long-run other firms will attempt to get in on the action. Just like the cellphone industry, when at first phones were very expensive to buy and maintain then now a days cellphones are given away as long as you make a commitment to the company with a contract, the electricity industry would branch out into multiple major companies who would then implement competitive prices to beat the other firms.

  222. jlamunoon 22 Feb 2013 at 8:49 pm

    @jduplessis

    Very good answers. I completely agree with your points. Monopolies seek to maximize profit without a care for efficiency, and if allowed to raise the price without limit the firms currently supplying us with electricity and gas they would take away all consumer surplus without a blink of an eye

  223. mchastanet2on 13 Mar 2013 at 5:45 pm

    Why do governments regulate the prices in industries such as natural gas and electricity?

    Because companies tend to abuse from the consumers. Electricity and natural gas is primordial for most people, so people are ready to pay a lot to have those products. So firms usually increase their price since the products are inelastic( demand won’t change whatever the price is) . So if government don’t regulate companies will abuse consumers by putting high prices.

    Why would a state government think that de-regulation of the electricity industry might eventually result in lower prices in the long-run?

    Because the monopoly will start to make a lot of profit, so may new firms will try enter the market seeing this great opportunity. So the price will start falling ( much more supply) until everyone makes normal profit.

  224. mchastanet2on 13 Mar 2013 at 5:49 pm

    # avonwendorff

    Hey!

    i totally agree with your answers.

    i really liked the first answer ” governements are created to fullfill the needs of its people” that just says it all. Of course it has to take a fair party between the consumers and the firms.

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