Page 663 - Krugmans Economics for AP Text Book_Neat

Must Monopoly Be Controlled?
Sometimes the cure is worse than the disease. Some economists have argued that the
best solution, even in the case of a natural monopoly, may be to live with it. The case for
doing nothing is that attempts to control monopoly will, one way or another, do more
harm than good.
The following FYI describes the case of cable television, a natural monopoly that has
been alternately regulated and deregulated as politicians change their minds about the
appropriate policy.

fyi

Cable Dilemmas
Most price regulation in the United States goes widespread skepticism about whether price
back a long way: electricity, local phone service, regulation was actually a good idea and of in-
water, and gas have been regulated in most tensive lobbying by the cable companies.)
places for generations. But cable television is a After the law went into effect, however, cable
relatively new industry. Until the late 1970s, television rates increased sharply. The resulting
only rural areas too remote to support local consumer backlash led to a new law, in 1992,
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broadcast stations were served by cable. After which once again allowed local governments to
1972, new technology and looser rules made it set limits on cable prices.
profitable to offer cable service to major metro- Was the second round of regulation a success?
politan areas; new networks like HBO and CNN As measured by the prices of “basic” cable serv-
emerged to take advantage of the possibilities. ice, it was: after rising rapidly during the period of
Until recently, local cable TV was a natural deregulation, the cost of basic service leveled off. homes: over a high-speed fiber-optic Internet
monopoly: running cable through a town entails However, price regulation in cable applies connection. In some locations, fiber-optic Inter-
large fixed costs that don’t depend on how many only to “basic” service. Cable operators can try net providers have begun competing aggres-
people actually subscribe. Having more than one to evade the restrictions by charging more for sively with traditional cable TV companies.
cable company would involve a lot of wasteful premium channels like HBO or by offering fewer Studies have shown that when a second
duplication. But if the local cable company is a channels in the “basic” package. So some provider enters a market, prices can drop signif-
monopoly, should its prices be regulated? skeptics have questioned whether current regu- icantly, as much as 30%. In fact, the United
At first, most local governments thought so, lation has actually been effective. States is currently behind on this front: today
and cable TV was subject to price regulation. In Yet technological change has begun provid- 60% of households in Hong Kong watch TV pro-
1984, however, Congress passed a law prohibit- ing relief to consumers in some areas. Although grams delivered over the Internet. What will
ing most local governments from regulating cable TV is a natural monopoly, there is now an- these changes mean for the cable TV monopo-
cable prices. (The law was the result both of other means of delivering video programs to lies? Stay tuned.

Module 62 AP Review

Solutions appear at the back of the book.
Check Your Understanding
1. What policy should the government adopt in the following b. The only two airlines that currently fly to Alaska need
cases? Explain. government approval to merge. Other airlines wish to fly
a. Internet service in Anytown, OH, is provided by cable. to Alaska but need government-allocated landing slots to
Customers feel they are being overcharged, but the cable do so.
company claims it must charge prices that let it recover the
costs of laying cable.

module 62 Monopoly and Public Policy 621