Consider a regulated natural monopoly,such as an electricity distribution company,that faces falling long- run average costs.If it is forced to price its output at average cost it will provide

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If a regulated natural monopoly is forced to price its output at average cost, it will provide less output than what is socially optimal. This is because the firm will only be able to cover its costs, but will not have any incentives to produce at the level that maximizes social welfare. As a result, a socially optimal level of output will not be achieved.

Consider a Regulated Natural Monopoly,such as an Electricity Distribution Company,that