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government should restrict monopoly(market power), strong economies of…
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- strong economies of scale
natural monopoly: price regulation is most often used for natural monopolies, such as local utility companies. A natural monopoly is a firm that can produce the entire output of the market at a cost that is lower than what it would be if there were several firms.
efficient
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eg. BT Group, Ofcom
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Some industries are natural monopolies – due to high economies of scale, the most efficient number of firms is one. Therefore, we cannot encourage competition, and it is essential to regulate the firm to prevent the abuse of monopoly power.
- completion will drive price of exiting drug down to MC, P=MC
2.but it costs about a billion dollars to produce the average new drug
3.R&D costs are not included in MC
4.If P=MC, firms can not recover their R&D costs.
Result: Fewer new drugs will be created
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The government could buy the patent for a little more than the monopoly profits
competitors would enter and drive the price of the drug to its MC
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Music, movies, computer programs, new chemicals, new materials, new techonologies
High development cost and low MC of production lead to possible benefits of patent or copyright protection
Policy trade-off:lower price today, fewer new ideas in the future
Nobel Prize winner Douglas North, economic historian: The failure to develop systematic property rights in innovation up until fairly modern times was a major source of the slow pace of technological change.
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price ->MC the firm would lose money and go out of business?
If the price is regulated to AC: the largest possible output consistent with the firm's remaining in business, excess profit is zero
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