Page 800 - Krugmans Economics for AP Text Book_Neat

profits are avoided, and overall welfare increases. Unfortunately, things are rarely that
easy in practice. The main problem is that regulators don’t always have the information
required to set the price exactly at the level at which the demand curve crosses the aver-
age total cost curve. Sometimes they set it too low, creating shortages; at other times
they set it too high, increasing inefficiency. Also, regulated monopolies, like publicly
owned firms, tend to exaggerate their costs to regulators and to provide inferior quality
to consumers.

fyi

The Regulated Price of Power
Power doesn’t come cheap, and we’re not just Wind Associates signed the lease for a wind consumer? The dynamics of supply and de-
talking about the nearly $2 billion spent on con- farm off the coast of Massachusetts. The $2.5 mand provide one reason: as supplies of coal
gressional races in 2010. By 2017, Georgia billion project will generate 468 megawatts decrease and energy demand increases, the
Power plans to add two 1,100-megawatt nu- of electricity. With lower output and higher equilibrium price for coal energy will rise,
clear reactors to its Vogtle Electric Generating start-up costs than the coal-fired power plant, helping investments in wind energy to pay off.
Plant in eastern Georgia at an estimated cost the spreading effect is smaller, making the Another reason relates to the external costs
of $14 billion. In Kentucky, Louisville Gas and average fixed cost and the average total cost discussed in Module 75: wind turbines create
Electric will spend $1.2 billion to add a 750- relatively high. If regulators set prices for this no emissions. The U.S. Department of Energy
megawatt coal-fired generating unit. With high natural monopoly in accordance with average reports that if 20 percent of the nation’s en-
start-up costs like these, power plants are natu- total cost, we would expect coal-fired plants ergy needs were satisfied with wind, carbon
ral monopolies. If many plants competed for to be held to a lower price per kilowatt-hour dioxide emissions would fall by 825 million
customers in the same region, none would sell (kWh) than the relatively expensive wind metric tons annually. Like coal-fired power
enough energy to warrant the cost of each power plants. Indeed, Cape Wind plans to plants, wind farms do create some negative
plant. Here we see the spreading effect from charge 19 cents per kWh, more than twice externalities. The potential for noise and ob-
Module 55 in action—having just one plant al- the 8 cents per kWh allowed for electricity structed views elicit cries of “not in my back
lows the production level to be relatively high from coal-fired plants in Kentucky and yard (or even five miles off my coast)!” As
and the average fixed cost to be tolerably low. Massachusetts. with lunches, there’s no such thing as a free
On October 6, 2010, U.S. Interior Secretary Why the interest in generating energy from kWh, which highlights the importance of
Ken Salazar and representatives from Cape wind when energy from coal is cheaper for the cost-benefit analysis.

Module 77 AP Review

Solutions appear at the back of the book.
Check Your Understanding

1. Would each of the following business practices be legal under In order to buy your correction fluid, you require purchasers
antitrust law? Explain. to buy all of their office supplies from you.
a. You have a patent for a superior fax machine and therefore c. You own a car dealership and plan to buy the dealership
are the only person able to sell that type of fax machine. In across the street and merge the two companies. There are
order to buy your fax machine, you require the purchaser to several other car dealerships in town.
buy a service contract from you (even though other firms d. You and your only other competitor in the state have an
provide excellent service for your machine). agreement that, any time a new firm tries to enter the
b. You have invented a new type of correction fluid that does market, you will drop your prices for long enough to run the
an amazing job covering up mistakes made on paper forms. new entrant out of business before returning to your
previous prices.

758 section 14 Market Failure and the Role of Gover nment