With a natural monopoly, the fair-return price
A) is allocatively efficient; the socially optimal price is allocatively inefficient.
B) is allocatively inefficient; the socially optimal price is allocatively efficient.
C) and the socially optimal price are both allocatively inefficient.
D) and the socially optimal price are both allocatively efficient.

Question

Quizplus · Accepted Answer

With a natural monopoly, the firm can produce at a lower cost than any potential competitor, resulting in a market with just one firm. This market structure results in a deadweight loss, where the intersection of marginal cost and demand occurs where marginal cost is less than the price charged. Therefore, the fair-return price is allocatively inefficient because it is higher than the socially optimal price that would occur under perfect competition. The socially optimal price is allocatively efficient because it equals marginal cost, but this is not achievable in a natural monopoly.

With a Natural Monopoly, the Fair-Return Price