Question

Moses Inc. is a small electric company that provides power to customers in a small rural area in the Southwest. The company is currently maximizing its profits by selling electricity to consumers at a price of \(0.15 per kilowatt-hour. Its marginal cost is \)0.05 per kilowatt-hour, and its average cost is \(0.15 per kilowatt hour. A government regulator is considering a proposal to regulate the firm's price at \)0.05 per kilowatt-hour. Would such a policy improve social welfare? Explain.

Short answer

The regulation would not improve social welfare.

Step-by-step solution

social welfare

The social welfare implies well being of people that arises after an economic decision. Some business activities improve social welfare while others worsen it.

Explanation for social welfare

The regulation of the firm's price at $ 0.05 per kilowatt-hour would not improve social welfare.

At the current level of output and charged price, Moses Inc. earns zero economic profit since its price is equal to its average costs. Thus,

If the government regulates the price of electricity at $0.05 per kilowatt-hour, Moses Inc. would not cover its production costs and be forced to shut down the production. Under this scenario, consumers would have no electricity source.

Thus, described situation is an example in which monopoly pricing leads to higher social welfare than it would otherwise be at the regulated price.