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

Question

Quizplus · Accepted Answer

If a regulated natural monopoly is only able to charge an average cost, it will not be able to earn a return on its investment. Therefore, the company will limit its output to avoid incurring losses leading to lower output than social ideal. Thus, forcing average cost pricing results in a suboptimal output level.

Consider a Regulated Natural Monopoly, Such as an Electricity Distribution