1. What policy should the government adopt in the following cases? Explain.
Internet service in Anytown, Ohio, is provided by cable. Customers feel they are being overcharged, but the cable company claims it must charge prices that let it recover the costs of laying cable.
Cable Internet service is a natural monopoly. So the government should intervene only if it believes that price exceeds average total cost, where average total cost is based on the cost of laying the cable. In this case it should impose a price ceiling equal to average total cost. Otherwise, it should do nothing.
The only two airlines that currently fly to Alaska need government approval to merge. Other airlines wish to fly to Alaska but need government-allocated landing slots to do so.
The government should approve the merger only if it fosters competition by transferring some of the company’s landing slots to another, competing airline.