Choose the statement that best describes the dilemma facing the regulator of a natural monopoly.
A)Marginal-cost pricing leads to profit or losses; average-cost pricing results in allocative inefficiency.
B)Marginal-cost pricing will result in allocative inefficiency; average-cost pricing leads to profits or losses.
C)Marginal-cost pricing will result in productive and allocative inefficiency; average-cost pricing will not.
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 the firm because the price may be below average total cost, while average-cost pricing can result in allocative inefficiency because the price may be above marginal cost, leading to a deadweight loss.

Choose the Statement That Best Describes the Dilemma Facing the Regulator