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
A)less output than what is socially optimal.
B)more output than what is socially optimal.
C)the socially optimal amount of output.
D)more output than can be absorbed by the market.
E)so little output that there will be a shortage.

Question

Quizplus · Accepted Answer

If the regulated natural monopoly is forced to price its output at average cost, it will not be able to earn any profit. As a result, it will be incentivized to produce at the lowest cost possible. This means that it will produce less output than what is socially optimal. The socially optimal amount of output would be where marginal cost equals marginal benefit. In this case, because the firm's long-run average cost is falling, it means that it could produce more output at lower cost, but because it is forced to price at average cost, it will not do so.

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