The diagram below shows the market demand curve and the cost curves for a single firm.
FIGURE 12- 6
-Refer to Figure 12- 6.Suppose this firm is a government- owned natural monopoly and imposes a price so as to achieve allocative efficiency in this market.The amount of tax revenue that the government must raise elsewhere in the economy to offset the losses of this firm is represented by the area
A)0P2bQ2
B)P1P2bc
C)Q1dbQ2
D)P1P3ae
E)edbc

Question

The diagram below shows the market demand curve and the cost curves for a single firm.
  FIGURE 12- 6
-Refer to Figure 12- 6.Suppose this firm is a government- owned natural monopoly and imposes a price so as to achieve allocative efficiency in this market.The amount of tax revenue that the government must raise elsewhere in the economy to offset the losses of this firm is represented by the area
A)0P2bQ2 
B)P1P2bc 
C)Q1dbQ2 
D)P1P3ae 
E)edbc

Quizplus · Accepted Answer

To achieve allocative efficiency, the firm would produce at Q1 where the marginal cost (MC) intersects with the demand (D) curve. In this case, the price charged would be P1. However, at this price and quantity, the firm incurs losses represented by the area P1P2bc. To offset these losses, the government would have to raise tax revenue equal to this amount from elsewhere in the economy. Therefore, choice B is the correct answer.

The Diagram Below Shows the Market Demand Curve and the Cost