Suppose a government sets the price for a natural monopoly at the competitive level such that P = MC. To keep the seller from taking a loss under this policy, the government could provide a lump-sum payment to the firm. How could we determine this payment?

Question

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The lump-sum payment needed to cover the firm's losses when price is set to marginal cost (P = MC) in a natural monopoly can be determined by multiplying the competitive quantity by the difference between marginal cost (MC) and average cost (AC). This difference represents the loss per unit, and multiplying it by the quantity gives the total amount needed to cover losses.

Suppose a Government Sets the Price for a Natural Monopoly