In July 2008, the Federal Communications Commission approved the merger of satellite radio providers XM Satellite and Sirius Satellite Radio, establishing a single satellite radio company in America. If the new company was a natural monopoly, which of the following would be a regulation to ensure an efficient quantity of satellite radio service?

Question

Quizplus · Accepted Answer

In the case of a natural monopoly, the optimal price and output level can be achieved by setting price equal to marginal cost. Therefore, the application of the marginal cost pricing rule would ensure an efficient quantity of satellite radio service. This would prevent the monopolist from charging a higher price than necessary, and would also encourage them to produce at the socially optimal quantity. Choice A (average cost pricing rule) would not necessarily result in an efficient quantity of output since it does not take into account the marginal cost of production. Government subsidization (Choice B) could potentially increase output, but it does not address the issue of pricing. Government taxation (Choice C) could reduce output, but it also does not address the issue of pricing.

In July 2008, the Federal Communications Commission Approved the Merger