When a government owns a natural monopoly and avoids subsidies, it:
A)creates deadweight loss.
B)sets the price above marginal cost.
C)recognizes that setting price equal to marginal cost would cause the enterprise to incur losses.
D)All of these are true.

Question

Quizplus · Accepted Answer

When a government owns a natural monopoly and avoids subsidies, it often results in creating deadweight loss because the price is set above marginal cost to ensure the enterprise does not incur losses. This is because setting the price equal to marginal cost, which is efficient from a market perspective, would indeed cause the enterprise to operate at a loss, given the high fixed costs typically associated with natural monopolies.

When a Government Owns a Natural Monopoly and Avoids Subsidies