The problem with socially optimal pricing regulation of a natural monopoly is that
A) P

Question

The problem with socially optimal pricing regulation of a natural monopoly is that
A) P < MC.
B) P < AVC.
C) P < ATC.
D) P < MR.

Quizplus · Accepted Answer

Socially optimal pricing regulation for a natural monopoly requires setting price equal to marginal cost (P = MC) to achieve allocative efficiency. However, since natural monopolies have economies of scale, their average total cost (ATC) curve continually decreases with increased production. Therefore, in order to set price equal to marginal cost, the price would need to be set below their average total cost, resulting in a loss for the firm. Thus, the socially optimal price for a natural monopoly is below its average total cost (P < ATC).

The Problem with Socially Optimal Pricing Regulation of a Natural