Q2 Z2,(Q2) Z2(Q2) - Institute for Water Resources - U.S. Army

product to be transported, Q1 units will travel by Mode One and demand
will be satisfied.
Figure 3.C.1 also brings out the social non-optimality of this
system. This is evident in two respects. First, the existing modal
split does not minimize total transport costs; second, total output in
the transportation industry(s) is restricted. Both of these conditions
arise from the profit maximizing behavior of the monopolist. If he
were forced to be a marginal cost pricer they would be eliminated. •
Under marginal cost pricing the monopolist Mode Two would carry C1 2 ,
charging a rate of T r . This would allow Mode One to capture only & I
although total traffic would increase to units. Thus, if he priced
according to marginal cost the monopolist would capture a larger share
of the market, even though his total profit would be reduced.
In Fig. 3.C.2 we have illustrated an even more interesting case.
Here the monopolist is assumed to display falling long run marginal
costs. Profit maximization requires that he set a rate of Tr and bring
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about the modal split Q 1 , Q 2 . However, it is in the best interests of
society to disband Mode One and revert to a true monopolistic situation.
Enforcement of marginal cost pricing would then result in the monop-
^
olist carrying all of Q at a rate of Tr. The monopolistic solutions
are stable if marginal cost cuts marginal revenue from below and profits
are positive. The social solutions require regulation, enforcement and,
if profits are negative, subsidies:
Parametric Associated Costs
Here we examine the two-mode model where one mode is composed of
a single firm and there are costs other than the transport rate
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