Reference no: EM131897159

Natural monopolies give rise to a monopoly that is socially justifiable. Two telephone companies, or gas companies, or water companies, or electricity companies in the same city would be highly inconvenient and costly as long as transmission requires wires and pipes. In such instances, it makes sense for government to grant exclusive franchises and then regulate the resulting monopoly through price to ensure the public interest is protected. A regulatory commission may attempt to establish the legal price for the monopolist that is equal to marginal cost at the quantity of output chosen. This is called the "socially optimal price."

However, government has since deregulated the gas and electric companies. What has been the economic impact on pricing?