Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 9] PRICE AND OUTPUT UNDER PURE MONOPOLY 231
(b)
(and so there is an underallocation of resources to the industry and a misallocation of resources in the
economy).
In industries operating under cost and technological conditions (such as constant returns to scale) that make
the existence of perfect competition feasible, the breaking up of a monopoly (by government antitrust action)
into a great number of perfectly competitive firms will result in a greater long-run equilibrium output for the
industry, a lower commodity price, and usually a lower LAC than under monopoly. However, because of cost
and technological considerations, it is not feasible to break up natural monopolies into a great number of perfectly
competitive firms. In such cases, comparison of the long-run equilibrium position of the monopolist
with that of the perfectly competitive industry is meaningless. In dealing with natural monopolies, the government
usually chooses to regulate them rather than break them up. (We will return to this general topic in
Sections 14.12 and 14.13.)
REGULATION OF MONOPOLY
9.18 (a) What maximum price should the government impose on the monopolist of Problem 9.9 to induce
this monopolist to produce the competitive industry output level? (b) Compare the equilibrium point
of the regulated with that of the unregulated monopolist.
(a)
By imposing a maximum price at the point where P ¼ SMC, the government can induce the monopolist
to produce the perfectly competitive industry output level. This is given by point B in Fig. 9-21, where
the market D curve intersects the SMC curve (which could be taken as the perfectly competitive
industry short-run supply curve if we assume, among other things, that factor prices are constant).
Fig. 9-21
(b)
In Fig. 9-21, the D curve of the regulated monopolist is ABK, while his MR curve becomes ABCL.
Thus, the regulated monopolist would behave as a perfectly competitive firm and produce where P
or MR ¼ SMC. The result is that price is lower (about $8.50 rather than $9), output is greater (a
little less than 3.5 units rather than 3 units), profit per unit is less (about $1.50 rather than $2), and
total profits are reduced (from $6 to about $5.25). Thus the consumer is now better off (being able
to buy more of the commodity at a lower price) and the monopolist is worse off (total profit is now
less).
9.19 (a) What lump-sum tax should the government impose on the monopolist of Problem 10.9 in order to
eliminate all of that monopolist’s profits? (b) Compare the equilibrium point of the regulated with that
of the unregulated monopolist.
(a)
Since the unregulated monopolist makes a maximum total profit of $6 in the short run, the government should
impose a lump-sum tax of $6 to eliminate all of the monopolist’s profits.