Question Details

Use a graph to illustrate the market for electricity distribution if the government sets price equal to average total cost.



1. Prior to the late 1990s, the same company that generated your electricity also
distributed it to you over high voltage lines. Since then, 16 states and the District
of Columbia have begun separating the generation from the distribution of electricity,
allowing competition between electricity generators and between electricity
distributors.
a. Assume that the market for electricity distribution was and remains a natural
monopoly. Use a graph to illustrate the market for electricity distribution if the government sets price equal to average total cost.
b. Assume that deregulation of electricity generation creates a perfectly competitive
market. Also assume that electricity generation does not exhibit the characteristics
of a natural monopoly. Use a graph to illustrate the cost curves in the long-run equilibrium for an individual firm in this industry.




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