What are the reasons that are usually given to justify regulation?
What will be an ideal response?
Following are the reasons offered to regulate an industry:
| 1. | The industry may be characterized by economies of scale and/or scope. If so, there are cost advantages to having a single firm produce the entire industry output. However, such a monopoly might abuse its position and charge high prices. To obtain the cost advantages without the price disadvantages, regulation may be proposed. |
| 2. | A particular good or service may be seen as essential, and universal service for all may become an objective. In order to provide service to all at a uniformly low cost, a firm will need to cross-subsidize-charge prices that are above or below the actual cost of service. Such a firm is vulnerable to new entry, which seeks to “cream skim” where prices are higher. Therefore, part of regulation in such industries includes limit or prevention of entry. |
| 3. | For some industries there may be self-destructive competition. This can occur if there are large economies of scale with high fixed investment as in the case of railroads. Rate wars that push prices down to cover only marginal costs result in long-run destruction of the industry unless regulation of rates prevents it. |
| 4. | Consumers may be misinformed or cheated by firms, or there may be environmental damage from some firms. This is not a justification for price or rate-of-return regulation, however. |
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When is a collusive agreement between two firms likely to break down?
What will be an ideal response?
The Federal reserve prefers to use open market operations because
a. it allows for small changes. b. its effects are well understood. c. it is easy to conduct. d. both a and b. e. all of the above.
The Phillips curve indicates that when the labor market is ________, production costs will ________ and aggregate supply decreases
A) easy; rise B) easy; fall C) tight; fall D) tight; rise
"I'm tired of eating muffins for breakfast. Today I am trying a bagel." This statement most clearly reflects the: a. ceteris paribus condition
b. the law of supply. c. law of diminishing marginal utility. d. law of comparative advantage.