For a natural monopoly, the efficient quantity is produced when the firm is regulated so that A) P MC. D) P ATC. E) P = MC.

Question

For a natural monopoly, the efficient quantity is produced when the firm is regulated so that
A) P < MC.
B) P = ATC.
C) P > MC.
D) P > ATC.
E) P = MC.

Quizplus · Accepted Answer

In a natural monopoly, the firm has economies of scale, which means that it can produce the entire market demand at a lower cost than any potential competitors. Therefore, it is efficient for only one firm to produce the entire market output. However, in the absence of regulation, the natural monopoly may charge a price that is higher than the marginal cost, resulting in a deadweight loss to society. Therefore, the firm should be regulated to produce at the quantity where P = MC, which represents the socially efficient output level. This ensures that the price charged is equal to the cost of producing the last unit, and there is no deadweight loss. Therefore, the correct choice is E.

For a Natural Monopoly, the Efficient Quantity Is Produced When