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) 0P2bQ2
D) edbc
E) Q1dbQ2

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) 0P2bQ2 
D) edbc 
E) Q1dbQ2

Quizplus · Accepted Answer

To achieve allocative efficiency, the price should be set at P2 where MC=Demand. At this price, the firm incurs losses equal to the area P2bcQ2. The amount of tax revenue needed to offset these losses is represented by the same area, which is option B.

The Diagram Below Shows the Market Demand Curve and the Cost