The newly founded country of Cardamom, which has similar laws to the United States, has a wealthy government with plenty of resources to help them run the country; they also have extensive electricity generation knowledge and resources. Spark is a natural unregulated monopoly in the country of Cardamom, which currently controls the country's electricity supply and makes an annual profit of $250,000. Recently, Spark's outrageous electricity prices have led to riots and general public discontent. In response, the government is considering various public policies to decrease the inefficiency. Classify the suggestions based on whether the government recommendations are potentially plausible or not. Plausible actions by the government Implausible actions by the government Answer Bank The government regulates output at the point where marginal revenue = marginal cost. The government recommends Spark buying out and merging with the country's public education system. The government tells Spark to spend $1 billion on research to reduce their fixed costs. The government requires Spark to shut down all electricity operations. The government regulates prices such that marginal cost = demand = price and pays Spark a subsidy for the economic loss. The government decides that a brand new currently unestablished private start up company should install new power lines and power stations which would cost $5 billion, directly next to Spark's power lines and power stations to compete with Spark. The Cardamom government buys out Spark for a reasonable price and runs the electricity business themselves, charging customers prices such that marginal cost = demand = price.

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter25: Government And Product Markets: Antitrust And Regulation

Section: Chapter Questions

Problem 12QP

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Transcribed Image Text:The newly founded country of Cardamom, which has similar laws to the United States, has a wealthy government with plenty of resources to help them run the country; they also have extensive electricity generation knowledge and resources. Spark is a natural unregulated monopoly in the country of Cardamom, which currently controls the country's electricity supply and makes an annual profit of $250,000. Recently, Spark's outrageous electricity prices have led to riots and general public discontent. In response, the government is considering various public policies to decrease the inefficiency. Classify the suggestions based on whether the government recommendations are potentially plausible or not. Plausible actions by the government Implausible actions by the government Answer Bank The government regulates output at the point where marginal revenue = marginal cost. The government recommends Spark buying out and merging with the country's public education system. The government tells Spark to spend $1 billion on research to reduce their fixed costs. The government requires Spark to shut down all electricity operations. The government regulates prices such that marginal cost = demand= price and pays Spark a subsidy for the economic loss. The government decides that a brand new currently unestablished private start up company should install new power lines and power stations which would cost $5 billion, directly next to Spark's power lines and power stations to compete with Spark. The Cardamom government buys out Spark for a reasonable price and runs the electricity business themselves, charging customers prices such that marginal cost = demand = price.

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