Which of the following best describes marginal cost regulation of a natural monopoly?
A) It generates economic profits for the seller.
B) It causes firms to produce less than the socially optimal output.
C) It creates incentives that tend to shift average total cost curves in a downward direction.
D) It imposes a price that is less than average total cost.

Question

Quizplus · Accepted Answer

Marginal cost regulation sets a price equal to the marginal cost of production. Since the marginal cost is generally less than the average total cost for a natural monopoly, this regulation will impose a price that is less than the average total cost. This can lead to losses for the seller, but it also leads to a socially optimal level of output.

Which of the Following Best Describes Marginal Cost Regulation of a Natural