In Figure 27.2,regulation designed to achieve allocative efficient pricing for the natural monopoly will result in a price of

Question

Quizplus · Accepted Answer

Allocative efficient pricing occurs when price equals marginal cost, which is where the marginal cost curve intersects the demand curve at the quantity where the monopolist maximizes profit. In Figure 27.2, this occurs at point B1, where the marginal cost curve intersects the demand curve. Therefore, the allocatively efficient price is the price corresponding to point B1 on the demand curve, which is PS1U1B1A.