If the government regulates a natural monopoly by forcing the firm to set price equal to marginal cost,
A) the firm will earn a negative economic profit.
B) the firm will earn zero economic profit.
C) the firm will earn a fair economic profit.
D) the firm will earn a positive and large economic profit.

Question

Quizplus · Accepted Answer

In a natural monopoly, the average total cost is decreasing due to economies of scale. If the government forces the firm to set price equal to marginal cost, the price will be below average total cost, leading to a negative economic profit.

If the Government Regulates a Natural Monopoly by Forcing the Firm