Question 1

Suppose the transportation industry has been regulated for many years. Government now proposes to deregulate the industry, only to find that firms in the industry oppose this action. This is consistent with the
A) public interest theory of regulation.
B) theory of natural monopolies.
C) legal cartel theory of regulation.
D) Alcoa and U.S. Steel court decisions.

Accepted Answer

The legal cartel theory of regulation states that industries can create a regulated environment that acts like a cartel, allowing firms to restrict competition and increase profits. In this scenario, the firms in the transportation industry may oppose deregulation because they benefit from the current regulatory environment, which limits competition and allows them to set higher prices.

Question 2

Critics of the regulation of natural monopolies contend that
A) regulation increases the incentive of firms to lower costs.
B) regulated firms may use creative accounting to reduce costs, prices, and profits.
C) when rates of return are based on the value of real capital, an uneconomic substitution of labor for capital may occur.
D) the industry may "capture" or control the regulatory commission.

Accepted Answer

Critics of regulation of natural monopolies argue that the regulatory commission may become too closely aligned with the industry it is regulating, leading to capture or control by the industry. This can result in regulatory decisions that benefit the industry rather than consumers.

Question 3

Critics of industrial regulation say that such regulation
A) benefits small firms at the expense of large firms.
B) perpetuates monopoly long after new technology has eroded natural monopoly.
C) creates insurmountable principal-agent problems.
D) has resulted mainly from the paradox of voting.

Accepted Answer

Industrial regulation is aimed at regulating industries that exhibit natural monopolies to promote competition, protect consumers, and promote efficiency. However, critics argue that regulation could perpetuate monopolies long after new technology has eroded the natural monopoly. This is because regulation allows existing firms to maintain their dominant position by setting entry barriers that prevent new firms from entering the market. This undermines the competitive market's ability to allocate resources efficiently and protect consumers from exploitation.

Question 4

Which of the following is characteristic of a regulated natural monopoly?
A) extensive economies of scale
B) the wasteful duplication of capital facilities in the event of competition
C) the provision of an essential service
D) all of these

Accepted Answer

Extensive economies of scale make it difficult and costly for new firms to enter the market and compete with the existing monopolist. This, in turn, necessitates regulation to prevent the wasteful duplication of capital facilities. Regulated natural monopolies provide essential services, such as water and electricity, which are necessary for consumers to carry out their daily activities. Therefore, all three characteristics mentioned in the options are typical of regulated natural monopolies.

Question 5

The view that the antitrust laws should be enforced relatively leniently because of the tendency for monopoly power to erode over time is known as the
A) structuralist view of antitrust.
B) behavioralist view of antitrust.
C) laissez-faire perspective on antitrust.
D) active antitrust perspective.

Accepted Answer

The laissez-faire perspective on antitrust holds that markets are self-regulating and that government intervention in the economy should be limited. This view suggests that the antitrust laws should be enforced relatively leniently because monopolies tend to erode over time without government intervention.

Question 6

The view that the antitrust laws need to be strongly enforced to prevent illegal business behaviors, monopolization of markets, and allocative inefficiency is known as the
A) structuralist view of antitrust.
B) behavioralist view of antitrust.
C) laissez-faire perspective on antitrust.
D) active antitrust perspective.

Accepted Answer

The answer of The view that the antitrust laws need...

Question 7

Which one of the following is concerned with industrial regulation, as distinct from social regulation?
A) Occupational Safety and Health Administration
B) Consumer Products Safety Commission
C) Federal Communications Commission
D) Environmental Protection Agency

Accepted Answer

The Federal Communications Commission is primarily concerned with industrial regulation, specifically in the areas of telecommunications and media. The Occupational Safety and Health Administration and the Environmental Protection Agency are both examples of social regulation, as they focus on protecting the health and safety of workers and the environment, respectively. The Consumer Products Safety Commission is also a form of social regulation, as it is responsible for ensuring the safety of consumer products.

Question 8

Using antitrust law to split up an unregulated natural monopoly into several competing firms
A) would reduce product price.
B) would increase product price.
C) might either increase product price or reduce product price.
D) would reduce average total cost.

Accepted Answer

Splitting up a natural monopoly into several competing firms may create inefficiencies and increased costs associated with duplication of infrastructure and equipment. However, competition typically leads to lower prices as firms strive to attract customers with lower prices and higher quality products. Therefore, it is possible that the outcome of splitting up a natural monopoly could either lead to lower or higher product prices depending on how the market adjusts to increased competition.

Question 9

The legal cartel theory of regulation argues that
A) regulation encourages firms to inflate their production costs.
B) firms in certain industries want to be regulated rather than face the rigors of competition.
C) social regulation has been carried beyond the point at which marginal benefits and marginal costs are equal.
D) the government is the logical agency to protect consumers from natural monopolies.

Accepted Answer

The legal cartel theory of regulation argues that firms in certain industries want to be regulated rather than face the rigors of competition. This is because regulation helps limit the number of firms in a market and allows them to collude on prices and other business practices. This creates a legal "cartel" that benefits the industry by limiting competition and increasing profits for the firms involved.

Question 10

Where there is natural monopoly, government is most likely to implement
A) social regulation.
B) antitrust policy.
C) industrial regulation.
D) an externality containment policy.

Accepted Answer

Industrial regulation is the most likely policy to be implemented by the government in a scenario where there is a natural monopoly. This type of regulation is aimed at controlling the prices charged by the monopolist, ensuring fair access to the market, and maintaining quality of service or product. Antitrust policies are not applicable since natural monopolies have no competitors. Social regulation is not relevant in this context as it deals with issues such as health and safety, and environmental standards. An externality containment policy is also not applicable as it is aimed at addressing external costs or benefits associated with production or consumption activities.

Question 11

The public interest theory of industrial regulation contends that
A) while industrial regulation is sound in theory, bureaucrats allow monopolists to obtain excessive profits.
B) regulated monopolies are tantamount to legal cartels.
C) the objective of regulation is to protect the public from the market power inherent in natural monopolies.
D) firms in some industries want to be regulated.

Accepted Answer

The public interest theory of industrial regulation suggests that the objective of regulation is to protect the public interest from the market power that natural monopolies hold. This means that regulation aims to ensure that natural monopolies do not abuse their market power and charge excessive prices, while also promoting fair competition in the market. This theory recognizes that regulation is necessary to correct market failures that lead to insufficient competition and consumer welfare.

Question 12

A major criticism of industrial regulation is that
A) it has been applied to virtually all major U.S. corporations in the post-Second World War period.
B) marginal cost pricing has created an underallocation of resources.
C) by allowing a fair return price, it gives natural monopolists little incentive to contain costs.
D) regulatory commissions have frequently caused natural monopolies to go bankrupt.

Accepted Answer

One major criticism of industrial regulation is that by allowing natural monopolists to receive a fair return price, there is little incentive for them to contain costs. This can lead to higher prices for consumers and an inefficient use of resources. Marginal cost pricing (choice B) is actually a method of regulation that encourages efficiency by setting prices based on the cost of production. Choice A is not a criticism, but rather a description of how industrial regulation has been applied. Choice D is also not a common criticism, as regulatory commissions are meant to prevent natural monopolies from going bankrupt by ensuring they receive a fair return on investment.

Question 13

The main purpose of industrial regulation is to
A) lower price to marginal cost.
B) lower price to average total cost such that the firm earns a fair return.
C) break monopolies into competing firms.
D) reduce X-inefficiency.

Accepted Answer

The main purpose of industrial regulation is to ensure that firms operate in an efficient and fair manner. This can include setting prices that allow for a fair return on investment, regulating monopolies to promote competition, and reducing X-inefficiency (inefficiency caused by factors other than market competition). Choice B aligns with this goal, as it aims to set prices that allow firms to cover their costs while also promoting competition and efficiency.

Question 14

All of the following are regulatory commissions dealing with industrial regulation (as distinct from social regulation) except the
A) Food and Drug Administration.
B) Federal Energy Regulatory Commission.
C) Federal Communications Commission.
D) 50 state public utility commissions.

Accepted Answer

The Food and Drug Administration (FDA) is a regulatory commission dealing with social regulation, specifically the regulation of food, drugs, cosmetics, and medical devices. The other options listed deal with industrial regulation, such as the regulation of energy, telecommunications, and public utilities.

Question 15

Suppose that two firms in an industry that has a Herfindahl index of 1,000 announce a merger. The U.S. Justice Department concludes the merger will boost the index to 1,050. The antitrust authorities will most likely
A) ignore this merger because of the relatively small size of, and increase in, the Herfindahl index.
B) prevent the merger, contending that it violates the Clayton Act.
C) allow the merger if foreign entry to the industry is possible.
D) allow the merger but watch the new firm carefully for future violations of the antitrust laws.

Accepted Answer

The U.S. Justice Department typically considers a market with a Herfindahl index below 1,500 to be unconcentrated. An increase of 50 points in such a market is generally not significant enough to warrant blocking the merger.

Question 16

Economists who adhere to the laissez-faire antitrust perspective
A) view competition as a long-run dynamic process in which firms battle for dominance of markets but rarely can sustain such dominance once it is achieved.
B) believe the antitrust laws are as important today as they were when they were passed in the early 1900s.
C) say that an industry's structure, which is based on economies of scale, usually predicts the behavior of the industry firms.
D) contend that large, dominant firms should be broken into smaller competitive firms and then government should stand back and let competition prevail.

Accepted Answer

Economists who adhere to the laissez-faire antitrust perspective believe in the importance of competition as a long-run dynamic process. They argue that although firms may initially achieve dominance, they are rarely able to sustain it. This belief is in contrast to those who support the antitrust laws, who view market dominance as a persistent problem that requires government intervention to solve.

Question 17

A firm is likely to be a natural monopoly
A) when the demand for its product or service is inelastic.
B) if it is producing an inferior good.
C) if economies of scale are experienced over the full range of output.
D) because government grants it an exclusive franchise.

Accepted Answer

A natural monopoly occurs when a single firm can produce the entire output of the market at a lower cost than any potential competitor. This is usually due to economies of scale, which occur when the average cost of production decreases as output increases. Therefore, the correct choice is C as it states that economies of scale are experienced over the full range of output. Choices A, B, and D do not accurately describe the conditions for a natural monopoly.

Question 18

A market in which the entire demand for a good or service can be satisfied at the least cost by a single firm is a
A) horizontal market.
B) natural monopoly.
C) contestable market.
D) perfect market.

Accepted Answer

A natural monopoly occurs when a single firm can produce output and supply the entire market demand at a lower cost than any potential competitor. This is often due to high fixed costs, making it difficult for new firms to enter the market without incurring significant costs themselves.

Question 19

Critics of industrial regulation say that such regulation
A) contributes to X-inefficiency.
B) benefits small firms at the expense of large firms.
C) creates insurmountable principal-agent problems.
D) suffers from the free-rider problem.

Accepted Answer

Critics of industrial regulation argue that regulations often result in higher costs for businesses, which they pass on to consumers in the form of higher prices. This can lead to X-inefficiency, where firms are not operating at the lowest cost possible. X-inefficiency is a type of inefficiency that occurs when a firm is producing at a higher cost than is necessary to produce the same output.

Question 20

Overall, economists believe that deregulation of industries formerly subjected to industrial regulation
A) has been a clear failure.
B) is neutral in its impact on society's well-being, creating minimal net benefits at best.
C) has produced large net benefits for consumers and society.
D) has produced sizable efficiency gains in the communications industry, but not in the transportation industry (railways, trucking, airlines).

Accepted Answer

Economists generally believe that deregulation has produced large net benefits for consumers and society. This is because deregulation has led to increased competition, reduced prices, and improved efficiency in many industries, including telecommunications, banking, and energy. While there have been some negative consequences of deregulation, such as job losses and increased market concentration, overall the evidence suggests that deregulation has been beneficial.

Quiz 21: Antitrust Policy and Regulation

Suppose the transportation industry has been regulated for many years. Government now proposes to deregulate the industry, only to find that firms in the industry oppose this action. This is consistent with the

Critics of the regulation of natural monopolies contend that

Critics of industrial regulation say that such regulation

Which of the following is characteristic of a regulated natural monopoly?

The view that the antitrust laws should be enforced relatively leniently because of the tendency for monopoly power to erode over time is known as the

The view that the antitrust laws need to be strongly enforced to prevent illegal business behaviors, monopolization of markets, and allocative inefficiency is known as the

Which one of the following is concerned with industrial regulation, as distinct from social regulation?

Using antitrust law to split up an unregulated natural monopoly into several competing firms

The legal cartel theory of regulation argues that

Where there is natural monopoly, government is most likely to implement

The public interest theory of industrial regulation contends that

A major criticism of industrial regulation is that

The main purpose of industrial regulation is to

All of the following are regulatory commissions dealing with industrial regulation (as distinct from social regulation) except the

Suppose that two firms in an industry that has a Herfindahl index of 1,000 announce a merger. The U.S. Justice Department concludes the merger will boost the index to 1,050. The antitrust authorities will most likely

Economists who adhere to the laissez-faire antitrust perspective

A firm is likely to be a natural monopoly

A market in which the entire demand for a good or service can be satisfied at the least cost by a single firm is a

Critics of industrial regulation say that such regulation

Overall, economists believe that deregulation of industries formerly subjected to industrial regulation