Choose the statement that best describes the dilemma facing the regulator of a natural monopoly.
A)Marginal- cost pricing will result in allocative inefficiency; average- cost pricing leads to profits or losses.
B)Marginal- cost pricing will result in productive and allocative inefficiency; average- cost pricing will not.
C)Marginal- cost pricing leads to profit or losses; average- cost pricing results in allocative inefficiency.
D)Both kinds of regulation have the same implications for allocative efficiency.
E)There is no dilemma.

Question

Quizplus · Accepted Answer

Marginal-cost pricing can lead to losses for a natural monopoly because the price may be below average cost, while average-cost pricing can result in allocative inefficiency as it may not reflect the true marginal cost of production.

Choose the Statement That Best Describes the Dilemma Facing the Regulator