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) there is no dilemma
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) marginal- cost pricing will result in allocative inefficiency; average- cost pricing leads to profits or losses

Question

Quizplus · Accepted Answer

The dilemma facing the regulator of a natural monopoly is whether to use marginal-cost pricing or average-cost pricing. Marginal-cost pricing will lead to allocative efficiency but may result in profit or losses for the company. Average-cost pricing will not result in profit or losses but will result in allocative inefficiency. Therefore, the regulator must choose between sacrificing allocative efficiency or risking profit or losses for the company.

Choose the Statement That Best Describes the Dilemma Facing the Regulator