Consider a natural monopoly that has declining ATC over the entire range of the market demand curve. If it is regulated and required to charge a price that is equal to MC, the resulting level of output is
A) less than the allocatively efficient level, but losses occur.
B) greater than the allocatively efficient level, but losses occur.
C) allocatively efficient, but the firm must be paid a subsidy or it will eventually go out of business.
D) less than the allocatively efficient level, and profit is zero.
E) allocatively efficient, and profit is earned.

Question

Quizplus · Accepted Answer

When a natural monopoly is required to charge a price equal to MC, it achieves allocative efficiency, but since ATC is declining, MC is below ATC, leading to losses unless subsidized.

Consider a Natural Monopoly That Has Declining ATC Over the Entire