1. The USPS is regulated as a “natural monopoly.” What does it mean to be a natural monopoly, and why is the USPS a likely example of it?

A natural monopoly can serve the market more efficiently than multiple firms could because the marginal cost of production is decreasing everywhere over the relevant range of production. As a result, average costs fall as more is produced. The marginal cost of the USPS going to another house on a mail carrier’s route is relatively low.

2. What does it mean when the USPS argues that it must raise prices to continue to earn a “normal profit?”

A normal profit implies zero economic profit; that is, the USPS is earning enough to cover all of its expenses (including imputed costs), but no more. So when the Post Office faces a cost increase, revenues must increase correspondingly.

3. If the original cost of a stamp, 2 cents, was adjusted for inflation over time, that same stamp would cost 41 cents in 2005. What, if anything, does that say about the ability of the USPS to regulate its own costs?

The real price of a stamp has fallen, so its costs of production have fallen. This indicates that the USPS has actually regulated its own costs effectively.

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