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Mono rail
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Transcript of Mono rail
PRESENTED BYLAKHAN S. MEENA
K.RAMANMANISH HAIRATM.VIJAYA KUMAR
-A Case Study of Indian Railways
Need for Regulati on
of a Natural Monopoly
What is a monopoly?• A firm is considered a monopoly if . . .–It is the sole seller of its product–Product has no close substitutes
Monopoly - Introducti on
• Barriers to entry• Legal/Government Restrictions• Advantage of economy of scale• High cost of entry
Why do Monopolies Arise?
• A condition, created by circumstances- not by law• The largest supplier in an industry, often the first
supplier in a market, having cost advantage over potential competitors
• Fixed costs dominate. Creating economies of scale that are large in relation to size of market
• When fixed cost dominates, large customer base is required to achieve profit
• Therefore, new entrants are deterred from entering the market
Natural Monopoly
ATC
AVC
MC
D=MB
MR
Q
P
Pm
Qm
Ppc
Qpc
Monopoly
MR=MC
MC=MB
ATCAVC
MC
D=MB
MR
Q
P
Pm
Qm
Ppc
Qpc
Total Revenue
Total Profit
Total Cost
Monopoly
ATCAVC
MC
D=MB
MR
Q
P
Pm
Qm
Ppc
Qpc
Monopoly
ATC
AVC
MC
D=MB
MR
Ppass
Qpass
Pm
P
Q
TOTAL REVENUETOTAL COST
TOTAL LOSS
IR-Passenger Service
P<AVC
ATC
AVC
MC
D=MB
MR
P
QQm’
Pm’
Ppc
Qpc
TOTAL REVENUETOTAL COST
TOTAL PROFIT
IR-Freight ServicePm’<Pm
TOTAL REVENUE
ATC
AVC
MC
D=MB
MR
P
QQm’
Pm’
Ppc
QpcQr
Pr
TOTAL COST
TOTAL PROFIT
IR-Aft er Regulati onMin of
ATC
11
• The Regulator digs deep into the operations of a business and takes some of the firm’s decisions under its own control
• Regulators want to achieve economic efficiency, which they do by telling the firm what price it can charge
Regulati on of Natural Monopoly
12
Quantity
Price
D
MRAC
MC
C1
P1
Q1
An unregulated monopoly will maximize profit at Q1 and P1
MC2
P2
Q2
•Regulator will not allow the monopoly to charge P1 , its profit-maximizing price.
Unregulated Price
•Ideally Regulator would like monopoly to charge P2 , where P2 = AC (break –even point)
Regulated Price
Regulati on of Monopoly – Opti on 1
13
Quantity
Price
D
MRAC
MC
C1
P1
Q1
P2
Q2
Unregulated Price •Regulator may like monopoly to charge P2 , where P2 = MC, and this would generate a loss to the monopoly, as P2 < AC2
Regulated Price
AC2
•The monopoly would need a subsidy in this case equal to (AC2 – P2 )
Regulati on of Monopoly – Opti on 2
14
• Similarly if regulator wishes to achieve production efficiency (P = minimum AC), here too the monopoly operates at a loss and would need a subsidy
Regulati on of Monopoly
15
• The regulator may allow the monopoly firm to charge in between the two extreme cases, and the monopoly firm can increase profits by cutting costs
• With price regulation, the monopolist produces more, at a lower price
Regulati on of Monopoly
16
Ideally, the monopolist will continue this way until and sells at price = MC to the last group / for the remaining quantity
Q1
P1
The first group - Pays P1
Q2
P2 The second group - Pays P2
Quantity
Price
D
Under perfect price discrimination, the monopolist charges a different price to different buyers
MC
Price Discriminati on
17
• A monopoly may be able to increase its profits further through price discrimination – charging different prices to different categories of buyers
Price Discriminati on
18
The profits on the sales to high-price customers are enough to cover the losses on the sales to low-price customers
Quantity
Price
D
ACMC
Suppose that the Regulator allows the monopoly to charge a price of P1 to some users ( Premium service to premium class)
P1
Q1
C1
Other users are offered the lower price of P2 (Basic service such as Second class & Sleeper class travel)
P2
Q2
C2
Regulati on of Monopoly- Opti on 3
19
• Another approach is to allow the monopoly to charge a price above marginal cost that is sufficient to earn a “fair” rate of return on investment
Regulati on of Monopoly- Opti on 4
Consumer Surplus is Increased by Regulati on
• In any event, success or failure, government regulation has significant costs:–Collecting information on demand and costs–Creating and staffing bureaucracies to
administer and ensure compliance with the regulations–Regulated firms also have huge compliance
costs
Costs of Regulati on
Thank You