There has been much discussion of deregulating electricity and natural gas delivery companies in the United States. Discuss the likely effect of deregulation on prices in these two industries

Answer 1

If deregulation leads to increased competition, then production and prices should move toward the competitive equilibrium. If deregulation does not lead to increased competition, then the monopoly production and price outcome is likely. If the industries are characterized by economies of scale, then costs and prices could rise if more than one firm supplies output to the market. Because the industries are likely to have economies of scale, consumers may be better off having one firm supply the product in order for that firm to achieve lower average total costs by producing more output than by having two or more firms share the total output demanded in the market. If the regulators set the price at the average total cost, consumers likely benefit from the characteristics of a natural monopoly, but the firm does not have an incentive to minimize costs. Thus, there is a tradeoff between the advantage of lower costs that arise from having one firm versus the disadvantage of having a firm that may not minimize the costs of production.