Regulation of a natural monopoly will maximize the sum of consumer surplus and producer surplus if the firm is regulated with
A)an average cost pricing rule.
B)a rate of return regulation.
C)a price cap.
D)capture theory.
E)a marginal cost pricing rule.

Question

Quizplus · Accepted Answer

A natural monopoly has high fixed costs and low marginal costs, which makes it efficient to produce at a level where price equals marginal cost. Therefore, regulating a natural monopoly with a marginal cost pricing rule will ensure that the price charged for the product equals the efficient level of production, maximizing both consumer and producer surplus. Average cost pricing rule will result in the firm not being able to cover their costs, and rate of return regulation or price cap may not incentivize the firm to produce at the efficient level. Capture theory is not a type of regulation.

Regulation of a Natural Monopoly Will Maximize the Sum of Consumer