a. In the market for “water supply” consumers typically have several options (e.g., Ghana Water and Sewage, Own Well water, etc.) yet we often think of firms in this industry as behaving like monopolists. Using your understanding of monopoly, discuss the context in which your water provider is a monopolist. Is this characterization universally applicable? Carefully explain your answer (5 marks).
b. One solution to the problems of marginal-cost pricing of a regulated monopolist is average cost pricing. In this model, the monopolist is allowed to price its production at average total cost. How does average-cost pricing differ from marginal-cost pricing? Does this solution maximize social well-being? (4 marks).
c. Why would it be economically efficient to require a natural monopoly to charge a price equal to marginal cost? Why do most regulatory agencies require natural monopolies to charge a price equal to average cost instead? (4 marks).