Describe the two problems that arise when
regulators tell a natural monopoly that it must
set a price equal to marginal cost.
A small town is served by many competing
supermarkets, which have the same constant
marginal cost.
a. Using a diagram of the market for groceries,
show the consumer surplus, producer
surplus, and total surplus.
b. Now suppose that the independent supermarkets combine into one chain. Using a new
diagram, show the new consumer surplus,
producer surplus, and total surplus. Relative
to the competitive market, what is the transfer
from consumers to producers? What is the
deadweight loss?