The rail system in Metropolis is a natural monopoly.If the government regulates the system by setting the fare equal to marginal cost, which of the following will be true?
A)Price and output will be higher than if the monopoly were unregulated.
B)Price and output will be lower than if the monopoly were unregulated.
C)Price will be lower and output higher than if the monopoly were unregulated.
D)Price will be higher and output lower than if the monopoly were unregulated.
E)Profit will be lower than if the monopoly were unregulated, but price and output could either increase or decrease.

Question

Quizplus · Accepted Answer

When a monopoly operates in a natural monopoly market, it usually charges a price higher than the marginal cost of production. This results in underproduction and allocative inefficiency. Setting the fare equal to marginal cost would result in a lower price and higher output, which would improve allocative efficiency. Therefore, the correct answer is C.

The Rail System in Metropolis Is a Natural Monopoly