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)P1P3ae.
B)P1P2bc.
C)edbc.
D)Q1dbQ2.
E)0P2bQ2.

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)P1P3ae. 
B)P1P2bc. 
C)edbc. 
D)Q1dbQ2. 
E)0P2bQ2.

Quizplus · Accepted Answer

To achieve allocative efficiency, the firm would have to set the price at P2, where the demand curve intersects with the MC curve. This would lead to a loss for the firm, represented by the area P2bc. The government would have to offset this loss through tax revenue. Therefore, the area representing the tax revenue required is P1P2bc.

The Diagram Below Shows the Market Demand Curve and the Cost