Which of the following statements regarding an average cost pricing rule for a natural monopoly is WRONG?
A) The firm makes zero economic profit.
B) More output is produced than if the firm maximised profit.
C) It sets price equal to average total cost.
D) It is efficient.

Question

Quizplus · Accepted Answer

An average cost pricing rule for a natural monopoly does not necessarily result in efficiency. Efficiency in economic terms typically means achieving an allocation of resources where it is impossible to make someone better off without making someone else worse off (Pareto efficiency). When a natural monopoly sets price equal to average total cost to make zero economic profit, it may still produce at a level where marginal cost is not equal to marginal benefit, which is a condition for efficiency. Therefore, stating that average cost pricing is efficient is incorrect.

Which of the Following Statements Regarding an Average Cost Pricing