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Occupational Health and Safety, Canadian Edition

15th Edition
by David L. Goetsch, University of West Florida and Oskaloosa-Walton Eugene Ozon, Algonquin College
1035 Solutions 49 Chapters 1450 Studied ISBN: 0133450244 Computer Science 5 (1)

Chapters 19: DQ 10

10. In view of the problems involved in regulating natural monopolies, compare socially optimal (marginal-cost) pricing and fair-return pricing by referring again to Figure 12.9. Assuming that a government subsidy might be used to cover any loss resulting from marginal-cost pricing, which pricing policy would you favor? Why? What problems might such a subsidy entail?


Step-By-Step Solution

10. In view of the problems involved in regulating natural monopolies, compare socially optimal (marginal-cost) pricing and fair-return pricing by referring again to Figure 12.9. Assuming that a government subsidy might be used to cover any loss resulting from marginal-cost pricing, which pricing policy would you favor? Why? What problems might such a subsidy entail?

Answer: Many of the regulatory problems associated with fair‑return pricing also apply to a policy of marginal‑cost pricing. In the unlikely case that a marginal‑cost pricing policy does not entail public subsidies, it is subject to fewer regulatory problems. While there is an incentive for firms to artificially inflate marginal-cost estimates, there is no disincentive to contain costs and efficiency-enhancing substitutions of capital for labor are not encouraged. Some of these conclusions do not hold in the more likely case where public subsidies are required.

Because marginal‑cost pricing fosters allocative efficiency, it is preferable to fair‑return pricing. However, if the firm requires public subsidies to produce at the socially optimal point, the same disincentive exists to minimize actual and estimated unit costs as with fair‑return pricing, since cost reductions will simply lead to a lower subsidy. Efficiency-enhancing substitutions of capital for labor are not encouraged, since regulators are not attempting to enforce a stipulated rate of return. While public subsidies to ensure allocative efficiency can be worthwhile from an economic perspective, they are usually politically unpopular, since voters are reluctant to provide large monopolistic firms with scarce public funds.


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