It's the imposition of rules by a governing body, backed by the use of penalties that are intended to modify the economic behaviour of individuals and firms.
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Example of a regulator in the UK?
Rail Regulator
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What is Public Interest Theory?
Maximisation of social welfare is more important than private surplus. Correction of market failures. Increases Allocative efficiency.
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What 4 curves are present in the diagram?
MR, AR, LRAC, LRMC.
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What are the characteristics of a Natural Monopoly?
Dominant economies of scale. Dominant sunk capital costs. Long run marginal costs that decrease over time.
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An unregulated solution occurs where under Natural Monopoly?
LRMC = MR.
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What are the consequences of an unregulated solution?
Low output and high prices so the firm can make supernormal profit.
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A regulated outcome occurs where under Natural monopoly?
LRAC = AR.
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What are the benefits of a regulated Natural Monopoly?
Higher outcome. Allocative efficiency. Quality of goods and services increase due to competition. Increased social welfare.
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What is Franchising?
Transfer of monopoly surplus back into public ownership. Auctioning of monopoly rights to the highest bidder.
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What is one problem associated with Franchising?
Cartel Bidding.
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What is Price Cap Regulation?
Permitted price caps = lower profits and reduced capital investment. Customer suffers due to lower social welfare.
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What is Regulatory Capture?
Where you Over Regulate - costly/overly-invasive. Under Regulate - Insufficient regulatory power.
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Why is Price-cap regulation used?
To stop firms making Supernormal profit.
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Other cards in this set
Card 2
Front
Example of a regulator in the UK?
Back
Rail Regulator
Card 3
Front
What is Public Interest Theory?
Back
Card 4
Front
What 4 curves are present in the diagram?
Back
Card 5
Front
What are the characteristics of a Natural Monopoly?
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