How should a natural monopoly be regulated under the social interest theory of regulation?
A) By setting price equal to the average cost of production.
B) By allowing a price that maximises the profit of the natural monopoly.
C) By using a marginal cost pricing rule.
D) By using rate of return regulation.
E) By subsidising other producers to compete with the monopoly.

Question

Quizplus · Accepted Answer

Under the social interest theory of regulation, a natural monopoly should be regulated by using a marginal cost pricing rule. This ensures that the monopoly operates efficiently and produces the socially optimal level of output, while allowing it to earn a reasonable rate of return on its investment. Setting price equal to the average cost of production or allowing a price that maximizes the monopoly's profit may lead to inefficiencies, while rate of return regulation may not incentivize the monopoly to operate efficiently. Subsidizing other producers to compete with the monopoly may not be effective in industries with high barriers to entry.

How Should a Natural Monopoly Be Regulated Under the Social