One problem with regulating a monopolist on the basis of cost is that
A)regulators are unable to effectively control prices and/or production.
B)it does not provide an incentive for the monopolist to reduce its cost.
C)a monopolist's costs, by definition, are higher than costs of perfectly competitive firms.
D)a monopolist is still able to generate excessive economic profits.

Question

Quizplus · Accepted Answer

Regulating a monopolist based on cost does not give the monopolist an incentive to reduce costs because they do not face competition. In a perfectly competitive market, firms must keep their costs low to stay competitive. However, because a monopolist has no competitors, they may choose to produce at higher costs and pass on the higher prices to consumers. Therefore, regulating a monopolist based on cost may not be effective in promoting efficiency and reducing prices for consumers.

One Problem with Regulating a Monopolist on the Basis of Cost