Applications of Price Gap and Adjustment Weights in Analyzing a Natural Monopoly with a Linear Decreasing Marginal Cost Function

Abstract

A natural monopoly can meet the market demand alone cheaply than several firms together can. A natural monopoly enjoys the economies of scale of production, marginal cost decreases at least in the range of market demand for its product. Assuming a decreasing linear marginal cost function, this paper derives all the competitive, regulatory, and monopoly equilibrium formulae of a natural monopoly model using the price gap and adjustment weights. If also offers welfare analysis and all possible comparisons. It also derives a formula for the minimum compensation that should be made to the natural monopoly to offer the competitive output. Any results of this paper can be applied independently.