Suppose the government regulates a natural monopoly by making the firm charge marginal cost.In order for the firm to make zero economic profits the government must pay a subsidy to the firm.What amount should this subsidy be?

Question

Quizplus · Accepted Answer

The subsidy should be the difference between Average Total Cost and marginal cost per unit. This is because, at marginal cost pricing, the firm's revenue per unit is less than its average total cost per unit, leading to losses. The subsidy covers this gap, allowing the firm to break even.

Suppose the Government Regulates a Natural Monopoly by Making the Firm