The problem with adopting a fair-return pricing policy for a natural monopoly is that
A) economic profits will be positive.
B) economic profits will be negative.
C) it is not productively efficient.
D) it is not allocatively efficient.

Question

Quizplus · Accepted Answer

Adopting a fair-return pricing policy for a natural monopoly may not result in allocative efficiency because it does not ensure that price equals marginal cost, which is necessary for allocative efficiency. Fair-return pricing policy only ensures that the monopoly earns a fair rate of return on its investments, but it does not necessarily lead to productive efficiency or allocative efficiency. If economic profits are positive, it may indicate that the monopoly is not setting prices at the level of marginal cost, and if economic profits are negative, it may indicate that prices are too low to cover costs and encourage investment in the long run.

The Problem with Adopting a Fair-Return Pricing Policy for a Natural